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) on my 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 apply to owner occupiers: if you live in your own home, you don’t 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. This would reduce their profit and the tax they pay on their tax return, either as an individual or within their company.
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.
Is your lease below 50 years?
If your lease is below 50 years, PIM2120 suggests you should be able to claim the professional fees for sorting your lease extension against your rental income – but not the premium!
Do I need to pay Capital Gains Tax (CGT) on my lease extension?
When an investment increases in value, you sometimes have to pay Capital Gains Tax on the profit you’ve made.
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 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 when you do a lease extension.
Can I offset the cost of the lease extension against the Capital Gain Tax Bill?
Yes! When you sell your property the Capital Gain is essentially the profit you’ve made on the transaction.
This means that if you’ve spent money on improving the flat – either via something like a loft conversion or a lease extension – then you can offset the cost against your Capital Gains tax too.
In addition to claiming the premium, usually you’ll also be able to claim the legal and valuation costs as part of this capital expense. This is outlined in PIM2120 which states “the legal and other costs will be capital expenditure. In such circumstances, the expenditure is analogous to a physical alteration or improvement to the landlord’s capital asset”.
There might be an opportunity to reduce your tax bill, particularly with Capital Gains Tax. The key is to make sure your keep solid records and ask your Tax Advisor for clarity if you’re not 100% sure.
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