Freehold Flat Company

[flats]

All leaseholders in our building formed a company in 1991 and bought the freehold of the building. The leases were then 76 years unexpired. We agreed to grant longer leases at no extra cost - just legal fees. One flat did not take up this option. This flat was sold on a few times and now the new lessee wants a lease extension. 16 years have passed and that lease is now only 59 years remaining. The value of a lease extension without a share of freehold is over £10,000 and we understand that the 'share of freehold' does not entitle the lessee to a free extension. However we are happy to grant the extension free. We want to know though, that if we give the extension free, will we be liable to tax, ie. as we are legally entitled to charge and the value is susbstantial will the Inland Revenue assume we have disposed of the lease extension at market value and want tax paid on it? Any guidance on this issue would be much appreciated as we do not want to end up with a tax liability. Many thanks indeed.

[Simon Sweetman]

The question is what is the company disposing of ? Generally the grant of a long lease (and presumably equally the grant of an extension) would be seen as a part disposal of the freehold interest which the company holds. So in theory there could be a gain with the allowable expenditure determined by the A/A+B formula where A is the market value of the lease extension and B is the value of the freehold after the grant. How this might work in practice is hard to see !

[CDavey9501@aol.com]

Maybe I have misunderstood but it looks like the leaseholder is not getting a share of the freehold just an extension to his lease. I thought that this would normally result in the termination of the old lease and the granting of a new lease.

Although it seems unfair (and I confess I am not sure of the correct answer) I would have thought that under the subjective intention concept that this would have been deemed to take place at market value and so corporation tax payable on the £10k?

[flats]

Thank you both. Yes, the leaseholder is not getting a share of the freehold because she already has that. It was the option to take up a longer lease that was not pursued 16 years ago. At that time the longer leases were not worth much - just a few hundred pounds, because the leases were at that time already quite long, and of course property values were falling in 1991. Now, a longer lease is worth a lot more. I'm not sure what to do. Perhaps the leaseholder concerned should pay for official tax advice before we proceed. Thank you very much indeed for your responses. Much appreciated.