Most flats in England and Wales are leasehold — meaning the buyer owns the right to occupy under a lease rather than owning the land outright. Lease length affects the property's value significantly, and transactions involving leases have specific CGT considerations.
Buying a lease extension: does it create a CGT event?
No. When a leaseholder pays a premium to extend their lease, they are acquiring an enhancement to their existing asset — a longer remaining term. This is not a disposal. No CGT arises at the point of the extension.
The premium paid for the lease extension is, however, a capital improvement cost. It is added to the base cost of the property for CGT purposes when the property is eventually sold. This reduces the gain on the later sale.
Example: You bought a leasehold flat for £200,000 (with costs of £5,000, making a base cost of £205,000). You later paid £20,000 to extend the lease. Your base cost for CGT on a future sale is now £225,000.
Keep the solicitor's bill and any valuation costs for the lease extension — these are all part of the allowable expenditure.
Selling a property with a long lease
If the property has a long lease (90 years or more remaining), there is no specific leasehold complexity. The gain is calculated in the standard way: proceeds minus base cost including any lease extension premium paid. The 60-day return applies if the gain is chargeable.
Selling a property with a short lease
Properties with fewer than 80 years remaining on the lease are harder to mortgage, which depresses market value. Below 80 years, the value of the lease starts to fall off more rapidly as the term shortens.
For CGT, the sale of a short-lease property is a disposal at whatever the buyer pays. If the low value is below the base cost, there may be a loss rather than a gain.
If the property has appreciated despite a shortening lease (perhaps in a prime central London location where land values are high), there may still be a gain. The computation is the same: proceeds minus base cost.
The wasting asset rule
Leases of 50 years or fewer are treated as wasting assets for CGT purposes under section 46 TCGA 1992. The base cost of a wasting asset is reduced over the lease term using a statutory depreciation table (Schedule 8). This table was designed for pre-1963 short lease transactions and is now most relevant to commercial leases.
Residential leaseholders with long original leases that have now fallen below 50 years should take specific advice, as the wasting asset rules could reduce the allowable base cost below the amount actually paid.
Collective enfranchisement: buying the freehold
A group of leaseholders can sometimes collectively purchase the freehold through the enfranchisement process under the Leasehold Reform Act. Each participating leaseholder pays a premium to the freeholder for their share of the freehold.
This premium is a capital acquisition — you are now a co-owner of the freehold as well as the leaseholder. If the freehold share is later sold (for example, when the flat is sold and you transfer the freehold share to the buyer), this is a separate disposal and may give rise to a gain.
Ground rent and CGT
Ground rent received by a freeholder is rental income, not a capital receipt. It does not affect CGT. If you sell the freehold and receive a premium, that premium is a disposal of the freehold interest and CGT may apply.
Practical points
For leaseholders selling their flat, the key CGT points are:
- Include the lease extension premium in your base cost as improvements.
- If the original lease was under 50 years, check whether wasting asset rules apply
- If you have extended the lease or purchased a share of the freehold, keep records of all premiums paid
If you are selling a leasehold flat with a chargeable gain — particularly one where you extended the lease or contributed to a freehold purchase — start your return at LetsFile. The Chartered Accountant/Chartered Tax Advisor ensures all base cost elements are correctly included before filing.