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TaxVince
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Category: UK Tax
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I own the freehold of a property in South London. Years ago

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I own the freehold of a property in South London. Years ago I granted a 99 year lease for which I receive an annual ground rent. The lessee now wishes to exercise her statutory right to have a new 125 year lease at peppercorn rent. She will have to pay about £10,000 - we do not yet have a valuation to work from. What will be the tax consequences for me as freeholder please?

Nick

MamaTax :

Hi Its MamaTax Here!

Thanks for the question.

For leases of more than 50 years, the lease premium is treated as a payment for a disposal of part of the property and hence capital gains tax will be charged in the hands of the landlord.


 

MamaTax :

However it also depends on how long the previous lease was outstanding. This is where it gets a little more complicated.

MamaTax :

Could you please let me know how long the other lease has been going?

MamaTax :

Thanks

Customer:

Yes, sorry I should have said that the current lease (which has not yet been extended as detailed negotiations have not yet started) is for 99 years original term. Currently there are still 68 years outstanding.

MamaTax :

Thanks for your patience.

MamaTax :



This is a grant of a long lease and because it is a part disposal rather than a disposal of the whole freehold interest, this is treated as capital transaction with the gain being computed on the sale proceeds less deductible base cost. Assuming this is an arm's length transaction and the lessee is an unconnected third party, the calculation of the gain is as follows:



Sale Proceeds: £10,000


less Cost: XX


Net gain: XX



Note the cost XX is calculated using the ‘A/A+B’ method of TCGA 1992, s 42, as shown on this example HERE ie lease base cost x A/(A+B), where A is the value of the lease disposed of, and B is the value of the freehold reversion retained.


However as you can see the gain is not something to worry since this will be washed away with the annual exemption of £10,900 given the proceeds are just £10,000, unless you have other gains during the year.


MamaTax :

Let me know if this suffices. If not please let me know.






If you are ok with the answer, could you please rate the question before you go so that i can get paid for the time.



Customer:

I will have a substantial loss for CGT this tax year and so no tax would be payable anyway. But I want to carry forward as large a loss as possible or try to delay the new lease until next year when as you say it would be below the threshold. I understand the answer though whether I will be able to work out the base cost is another matter.

Customer:

Thanks for your help.

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