Lease Extensions and Enfranchisement: The CGT and SDLT Treatment

A lease extension and a freehold purchase both fix the same underlying problem — a diminishing asset — but they are taxed on entirely different bases, for both sides of the transaction. With the Leasehold and Freehold Reform Act reshaping how much a lease extension actually costs, and enfranchisement remaining the more radical alternative, it is worth being clear which tax rules apply to which route before assuming they are interchangeable.

Two different transactions, two different tax treatments

A statutory lease extension leaves the freeholder in place and simply lengthens the leaseholder's term (and, since recent reform, typically reduces the ground rent to a peppercorn). A freehold purchase, whether by an individual leaseholder buying their own freehold or a group of leaseholders acting together under collective enfranchisement, removes the freeholder from the picture entirely. Because one leaves an existing lease in place and the other extinguishes the landlord relationship altogether, HMRC treats them very differently — and conflating the two is the most common source of tax mistakes on either side of the deal.

The freeholder's premium: capital, not income

Ordinarily, a premium received for granting a short lease (one with a term of 50 years or less) is split between capital and income for tax purposes, with part of the premium taxed as property income under the usual short-lease premium rules. Statutory lease extensions are a specific carve-out from that general rule: the premium received by the freeholder on a statutory lease extension is treated wholly as capital, taxed under the normal Capital Gains Tax part-disposal rules rather than partly as rental income. That matters because it changes both the rate of tax and the reliefs and losses that can be set against it.

Because the freeholder retains the reversionary interest and is only disposing of part of their rights (extending someone else's term rather than selling the whole asset), the gain is calculated using the standard part-disposal formula, apportioning the freeholder's original base cost between the part disposed of and the part retained by reference to the premium received against the value of what remains. Getting that apportionment right — particularly on a portfolio freeholder handling several extensions across a block — is where the calculation most often goes wrong, since each extension needs its own part-disposal computation rather than a simple pro-rata split across the block.

The leaseholder's side: no CGT, but SDLT still due

For the leaseholder paying the premium, HMRC treats a statutory lease extension as a continuation of the existing lease rather than a disposal of the old lease and acquisition of a new one. That means there is generally no CGT disposal event for the leaseholder at the point of extension: the premium paid is simply added to the base cost of the property, which reduces any gain (and therefore any CGT) when the property is eventually sold, rather than triggering an immediate charge.

SDLT is a separate question entirely, and it is still due. The leaseholder is the buyer in the transaction, and SDLT is charged on the premium paid, together in principle with the net present value of any rent reserved under the extended lease, at the normal residential or non-residential rates depending on the property. Since Multiple Dwellings Relief was abolished, a leaseholder extending several flats in one portfolio cannot rely on that relief to soften the aggregate SDLT cost, and each extension needs to be assessed on its own premium against the relevant thresholds. The freeholder, as the seller of the interest being extended, has no SDLT liability on the transaction at all.

Collective and individual enfranchisement

Enfranchisement is a different transaction in substance, not just in name, and the tax follows that difference. Whether a single leaseholder buys their own freehold or a group buys collectively through a nominee purchaser company, the freeholder is making a straightforward disposal of the freehold interest for CGT purposes — there is no part-disposal apportionment or lease-premium carve-out to apply, because nothing is being retained. The consideration received is compared against the freeholder's base cost in the ordinary way, and any gain is taxed as a standard property disposal.

On the buying side, SDLT is charged on the purchase price in the normal way. Where a nominee purchaser company is used for a collective claim, it is that company which is the buyer for SDLT purposes, and the usual company and non-natural person SDLT rules apply to it rather than to the individual leaseholders personally — a structural point worth checking before assuming the transaction will be taxed as if each leaseholder bought their proportionate share directly.

What the Leasehold and Freehold Reform Act changes (and what's still pending)

The direction of travel under the Leasehold and Freehold Reform Act is to make extension and enfranchisement cheaper and more accessible: a standard 990-year extension term in place of the previous 90 years for flats, ground rent reduced to a peppercorn on extension, and removal of the two-year ownership qualifying period that previously stopped a leaseholder extending or enfranchising shortly after buying. Several of these changes have been brought into force through commencement regulations, while others — most significantly, the intended abolition of marriage value from the premium calculation on leases with under 80 years remaining — have faced legal challenge from freeholder groups and remain subject to further secondary legislation before they take full effect.

None of the underlying tax treatment changes because of this reform — premiums are still capital for the freeholder, extensions are still not a disposal for the leaseholder, and SDLT is still due on the premium either way. What changes is the size of the premium itself, and therefore the amount on which SDLT and CGT are calculated. Anyone timing an extension or enfranchisement claim around this reform should check the current state of the valuation rules specifically, since which provisions are actually in force can move faster than general commentary keeps up with.

What this means in practice

For a freeholder receiving several lease extension premiums across a block, each one needs its own part-disposal CGT computation rather than a single aggregated figure, and the capital (not income) treatment should be applied consistently across the portfolio. For a leaseholder extending or enfranchising, the absence of a CGT charge on extension is not the same as the absence of SDLT — that liability still needs to be budgeted for and reported within the normal filing deadline. And for anyone weighing extension against enfranchisement, the choice should be driven by the commercial position (retaining a landlord relationship versus removing it entirely) rather than by any perceived tax advantage, since neither route offers a shortcut the other doesn't.

Common questions

Is a lease extension premium taxed as income or capital gain?

For the freeholder, a premium received on a statutory lease extension is treated as capital, taxed under the part-disposal rules rather than as rental income, even though premiums on some short leases are normally split between income and capital. This specific carve-out applies to statutory lease extension premiums, not to premiums negotiated informally outside the statutory process, which can be taxed differently depending on the lease term.

Does the leaseholder pay SDLT on a lease extension?

Yes. The leaseholder is the buyer in a lease extension transaction, and Stamp Duty Land Tax is due on the premium paid (and, in principle, on the net present value of any rent reserved) in the normal way, subject to the usual residential or non-residential rates and thresholds. The freeholder, as the party disposing of the interest, has no SDLT to pay.

Does extending a lease trigger CGT for the leaseholder?

Generally no. HMRC treats a statutory lease extension as a continuation of the original lease for Capital Gains Tax purposes rather than a disposal of the old lease and acquisition of a new one, so the leaseholder does not usually face an immediate CGT charge. The premium paid is instead added to the base cost of the property, reducing any gain when the property is eventually sold.

What tax applies to collective enfranchisement?

Collective enfranchisement is a straightforward purchase of the freehold, not a lease transaction, so it is taxed accordingly. The freeholder makes a normal CGT disposal of the freehold interest, and the leaseholders (usually acting through a nominee purchaser company) pay SDLT on the purchase price in the ordinary way, with no special lease-premium rules involved.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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