Many leaseholders planning a lease extension want to know whether a lease extension is tax deductible - i.e. can the lease extension cost be offset the cost against either Capital Gains Tax or Income Tax?
This article answers this question for a residential leaseholder of a long lease (originally above 21 years). It’s worth noting this is a summary of Government guidance and is designed to be general guidance to point you in the right direction – it is not tax advice!
We cover off these main questions:
- Can I offset the cost of my lease extension against income I receive from the property?
- Do I need to pay Capital Gains Tax (CGT) when I do a lease extension?
- Can I offset the cost of my lease extension against Capital Gains Tax (CGT)?
Can I offset the cost of my lease extension against income I receive from the property?
This question doesn’t usually apply to owner occupiers: if you live in your own home, you don’t usually derive any income from it.
But many BTL landlords are interested in knowing whether a lease extension is tax deductible, i.e. can any of the costs associated with the lease extension can be offset against their rental income for the year. This would reduce their profit and the tax they pay on their tax return, either as an individual or within their company.
From our research is seems in no cases can the “Premium” – that’s the price you pay for the extra years – be offset against your rental income. This is because the Premium is what is known as “capital cost” – i.e. it adds value to the capital value of your property. However, please read the Capital Gains section.
Do I need to pay Capital Gains Tax (CGT) when I do a lease extension?
When an investment increases in value, you sometimes have to pay Capital Gains Tax on the profit you’ve made when you come to sell it.
You don’t usually pay Capital Gains tax on your main private residence, because of something called Private Residence Relief. If you’ve extended your lease on the place you call home, then you can probably ignore this part of the article.
Important: There is usually no Capital Gains Tax (CGT) payable at the point you extend your lease
When you sell a property (which isn’t your main residence, as above) you’ll need to pay Capital Gains tax on the profit you’ve made. The reason this is mentioned in this article is that technically a lease extension involves “surrendering” your old lease and taking the grant of a new one – which is a bit like selling your flat to your freeholder and buying it back from them.
Fortunately, HMRC have taken a common sense view that despite the legal mechanics explained above, you’re not selling your flat. This protocol is called ESC D39. In short, this means that despite the fact you’re making a disposal of your old lease and taking out a new one, you won’t need to pay Capital Gains Tax at the point you do a lease extension.
Can I offset the cost of the lease extension against the Capital Gain Tax Bill?
When you sell your property the Capital Gain is essentially the profit you’ve made on the transaction.
If you’ve spent money on enhancing the value of the flat – either via something like a loft conversion or a lease extension – you can offset the related costs against the increase in value. This will reduce your profit and accordingly the Capital Gains Tax you'll pay on that profit.
In addition to claiming the lease extension premium against Capital Gains Tax, usually you’ll also be able to claim the legal and valuation costs as part of this capital expense.
This is outlined in BIM46420 which states in relation to professional fees on the renewal of leases: "Circumstances...where you should contend, in appropriate cases, that the expenditure is of a capital nature include those where: the new lease is for a long term (say, a period which exceeds, or may at the lessee’s option exceed, 50 years)”.
In Conclusion
So while there doesn't seem to be an opportunity to reduce your Income Tax, there might be an opportunity to reduce your Capital Gains Tax bill.
Hopefully the information above points you in the right direction. The key is to make sure your keep solid records and ask your Accountant or Tax Advisor for professional advice ahead of claiming any tax relief.
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