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Where Taxpayers and Advisers Meet

Lease extension, CGT and ESC D39

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Lease extension, CGT and ESC D39

Postby someone » Sat Aug 01, 2020 5:38 pm

My wife and I extended three leases last tax year (completed 26/02/20) under the statutory process.

I have discovered that this has a potential charge to CGT which can be avoided by ESC D39 (I had assumed there would be no CGT impact in extending a lease and my solicitor didn't mention one, only possible SDLT. I only found out while trying to update my spreadsheet on possible CGT liability)

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71240

I have a number of questions as a result of this:

1. Do we need to include this on the CGT pages of our tax return and reference ESC D39?

2. If the answer to 1 is No then should we mention it in the white space on the main form?

3. We have two residences for PPR purposes and we've previously made a PPR election. If we were to change that election now and back date it the two years would the fact that we did the backdating after the leases were extended still affect the CGT calculation? (If for any reason ESC D39 doesn't apply then changing our election now could potentially save us around 3K in CGT and a months delay in making that election will cost us another 150GBP)

4 If ESC D39 does apply then is the base cost now the original acquisition cost plus the lease extension premium (where my googling started!)?

5. Does this count as a new set of residences for CGT purposes and so do we need to redo our CGT election?


In the worst case the CGT liability is around 10K, which is not disastrous but will be annoying in the extreme if so as we could have trivially made it zero by (a) making the PPR election before completing and (b) delaying one of the extensions until the new tax year.

But I'd prefer to use ESC D39 as I have some PPR on one flat that is now let that I would (I assume) lose plus the PPR that has been built up in the other two properties over the years that we would also lose and reset the clock.

Should my solicitor have at least advised us to get CGT advice? (it's possible he knew ESC D89 applied but unfortunately the firm is no longer in business :-( )

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Re: Lease extension, CGT and ESC D39

Postby someone » Sun Aug 02, 2020 2:14 pm

FWIW I'm going to try to answer some of this based on my reading of the law:
TCGA 1993 S222 (5) says:

(5)So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period—

(a)the individual may conclude that question by notice to the inspector given within 2 years from the beginning of that period but subject to a right to vary that notice by a further notice to the inspector as respects any period beginning not earlier than 2 years before the giving of the further notice,

(b)subject to paragraph (a) above, the question shall be concluded by the determination of the inspector, which may be as respects the whole or specified parts of the period of ownership in question,

and notice of any determination of the inspector under paragraph (b) above shall be given to the individual who may appeal to the General Commissioners or the Special Commissioners against that determination within 30 days of service of the notice.

We gave a notice WRT our residences prior to the lease extension. Therefore the subsequent election is varying the notice and there doesn't seem to be any requirement that the variation be made before disposal.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64497
Seems to imply the same:
The nomination will have continuing effect until the earlier of,

The date on which the individual’s combination of residences changes, or
The date from which a variation of the original notice is to apply.

A variation of a notice will apply from the date specified in the notice of variation which may be up to two years before the giving of the notice.

Also:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64500
In practice an individual will not normally be aware of the need for a nomination until a residence is sold and a computation of the gain accruing is submitted. So the time limit for making a nomination should be extended for a reasonable period after the computation has been submitted and you have explained the need for a nomination.
Which implies that the nomination can be made after disposal but backdated to before disposal.

bd6759
Posts: 3200
Joined: Sat Feb 01, 2014 3:26 pm

Re: Lease extension, CGT and ESC D39

Postby bd6759 » Sun Aug 02, 2020 2:16 pm

I’m a little confused. When you say you extended leases, do you mean:

a. You received a premium from a tenant, or

b. You paid a premium to a landlord.

Your reference to CGT suggests you received a premium, but then confuse it by mentioning PPR which wouldn’t apply if the property was tenanted.

johnfkavanagh
Posts: 335
Joined: Wed Aug 06, 2008 3:08 pm

Re: Lease extension, CGT and ESC D39

Postby johnfkavanagh » Sun Aug 02, 2020 2:44 pm

I think you are being very ambitious expecting this query to be answered for free on this forum. This is a potentially complex area.

I think it is probably impossible to answer your question without knowing who holds the freehold, and in what capacity, i.e., whether beneficially or as nominee. Depending on the answer to that, you may not have a CGT issue at all.

Note that ESC D39 only applies if a market premium has been paid for the extended lease, so it is not necessarily as generous as it might appear at first blush. Again depending on who owns the freehold, and in what capacity, payment of a market premium may come with its own tax issues, leaving aside the CGT aspect for you.
John Kavanagh CTA ATT FRSA
Director, UK Tax Consulting Limited

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Re: Lease extension, CGT and ESC D39

Postby someone » Sun Aug 02, 2020 3:38 pm

I’m a little confused. When you say you extended leases, do you mean:

a. You received a premium from a tenant, or

b. You paid a premium to a landlord.

Your reference to CGT suggests you received a premium, but then confuse it by mentioning PPR which wouldn’t apply if the property was tenanted.
I'm the owner of the lease and I paid a premium to extend the lease under the the statutory provisions of the Leasehold Reform Housing and Urban Development Act 1993.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71240

As per that HMRC page it seems I "sold" my old lease plus premium and received my new lease as consideration.
However, the extension of a lease outside its original terms entails the surrender of the old lease and the grant of a new one. The surrender of the old lease is a disposal for the purposes of capital gains with the consideration received being the value of the new lease.

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Re: Lease extension, CGT and ESC D39

Postby someone » Sun Aug 02, 2020 3:48 pm

I think you are being very ambitious expecting this query to be answered for free on this forum. This is a potentially complex area.
Agreed, but I'd like to try and understand the situation before I submit my tax return rather than afterwards and it might even be worth me getting paid advice but I don't know where I'd even start finding someone specialist...
I think it is probably impossible to answer your question without knowing who holds the freehold, and in what capacity, i.e., whether beneficially or as nominee. Depending on the answer to that, you may not have a CGT issue at all.
I'm not sure why the freeholder should matter at all. I'm the lessee, not the lessor.
Note that ESC D39 only applies if a market premium has been paid for the extended lease, so it is not necessarily as generous as it might appear at first blush. Again depending on who owns the freehold, and in what capacity, payment of a market premium may come with its own tax issues, leaving aside the CGT aspect for you.
The lease was extended under the statutory provisions and was done between unconnected parties so I don't see how it can not be done at market value. I surrendered my old lease, plus the premium, (plus a shed load of legal fees :-( ) and received a new lease that was 90 years longer.

ESC D89 only applies to the lessee (https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71240)

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Re: Lease extension, CGT and ESC D39

Postby someone » Sun Aug 02, 2020 4:01 pm

ESC D89 only applies to the lessee (https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71240)
Should, of course, be ESC D39.

johnfkavanagh
Posts: 335
Joined: Wed Aug 06, 2008 3:08 pm

Re: Lease extension, CGT and ESC D39

Postby johnfkavanagh » Sun Aug 02, 2020 6:04 pm

Sorry, and I really don't mean to give offence, but all you have done is demonstrated that you are hopelessly out of your depth. Many professionals will not fully understand the tax implications of this,and it's certainly not going to be any easier to understand for an amateur. Had you answered the questions rather than question why they were asked, I might have been able to steer you in the right direction.
John Kavanagh CTA ATT FRSA
Director, UK Tax Consulting Limited

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Re: Lease extension, CGT and ESC D39

Postby someone » Sun Aug 02, 2020 6:29 pm

Sorry, and I really don't mean to give offence, but all you have done is demonstrated that you are hopelessly out of your depth. Many professionals will not fully understand the tax implications of this,and it's certainly not going to be any easier to understand for an amateur. Had you answered the questions rather than question why they were asked, I might have been able to steer you in the right direction.
Apologies. But I don't know how to answer your question, nor even how to get that information.

I know who the freeholder is: Bonneyhome Ltd. But I have no idea if they own the freehold beneficially or as nominee. The only interaction I have had with them is via their solicitors when I've paid the ground rent in the past.

If you can tell me what question I need to put to their solicitors then I can do that but I anticipate the response to my query to be "why do you need to know?"

Their accounts are for a dormant private limited company according to companies house if that helps answer your question. I'd guess that means they must be a nominee.

someone
Posts: 419
Joined: Mon Feb 13, 2017 10:09 am

Re: Lease extension, CGT and ESC D39

Postby someone » Mon Aug 03, 2020 12:37 am


I think it is probably impossible to answer your question without knowing who holds the freehold, and in what capacity, i.e., whether beneficially or as nominee. Depending on the answer to that, you may not have a CGT issue at all.

Note that ESC D39 only applies if a market premium has been paid for the extended lease, so it is not necessarily as generous as it might appear at first blush. Again depending on who owns the freehold, and in what capacity, payment of a market premium may come with its own tax issues, leaving aside the CGT aspect for you.
I've found this page:

https://www.taxadvisermagazine.com/article/tax-traps-tenant-owned-flat-management-companies

Which I think alludes to some of the complications you refer to.

However, I do not own or control the freehold, or a share of the freehold, in any capacity whatsoever. The extension was done at market price between unconnected parties.

Your post has been very educational, albeit in an indirect way. I did briefly look at the possibility of collective enfrancisement but the building is mixed residential and commercial and while I think we would meet the requirements, buying out the commercial interest appeared to be prohibitively expensive even on back of envelope best case projections. I had no idea of the possible hole we could have ended up in!

I have been in close communication with one long term lessee who lets their flat and must be sitting on a huge unrealized gain who recently extended their lease and they didn't mention CGT either. I spent many hours on sites like lease-advice.org and others, and wrote my own spreadsheet to calculate the premium based on the statutory formula but I never saw mention of capital gains tax anywhere. Given the potentially huge liabilities that could be incurred, I'm surprised that it doesn't get a somewhere promenent mention for second home/btl owners to seek advice. It was only because I have a spreadsheet for potential CGT liability and was googling to check whether I should just add the premium and legal fees to the base cost did I discover that CGT was possibly in scope!


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