A lease is a diminishing asset—its value declines as the remaining term shortens. The length of a lease can significantly affect mortgage availability, with many lenders unwilling to lend on short leases. This, in turn, can reduce buyer interest and negatively impact the property's marketability.
For these reasons, leaseholders often seek to extend their leases. However, it is very important to consider the cost of extending the leases and taxes implications before making the decision to carry it out. Once the lease falls below 80 years, the cost of extending it increases significantly due to the inclusion of "marriage value." This is an additional sum payable to the freeholder, reflecting the increase in the property's market value upon completion of the lease extensions. Notably, marriage value is deemed to be nil when a lease is extended while more than 80 years remain. Accordingly, it is generally advisable to extend the lease before it drops below this threshold to avoid the higher associated premium.
In the sections below, we explain the methods available for lease extensions and the tax consequences, particularly when the lease is extended under ‘Surrender & Regrant’.
Statutory Lease Extensions
If you wish to extend the lease by 90 years or below, there is a statutory right from HMRC that allows you to do so. This is a formal legal right under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended). If you qualify, you can extend your lease by 90 years, and your new lease will be rent-free (peppercorn rent).
Eligibility
Under a statutory lease extensions, the tax implications are generally modest, as the lease is typically extended by 90 years or less and no significant value is added in terms of new property rights.
The leaseholder may be liable to pay Stamp Duty Land Tax (SDLT) on any premium paid to the freeholder. Meanwhile, the freeholder may incur a Capital Gains Tax (CGT), as the transaction is treated as a partial disposal of their interest in the property. The method for calculating CGT is outlined in the following sections.
Where the lease term needs to be extended by more than 90 years, statutory rights may not apply. In such cases, the following options may be used to extend the lease:
Surrender and Regrant
The most common method of extending the term of a lease is through a surrender and regrant arrangement. This involves the leaseholder surrendering their current leasehold interest, and the freeholder granting a new lease over the same property—typically with extended terms. While this route can achieve the desired outcome of a longer lease, it also carries important tax implications for both parties.
Tax Implications to the Leaseholder
For the leaseholder, there are two taxes to consider, i.e. Capital Gains tax (CGT) on the surrender and Stamp Duty Land Tax (SDLT) when the freeholder regrants the lease on a new term with extended terms. Both tax implications are analysed below:
Capital Gains Tax (CGT)
From a CGT perspective, the surrender of an existing lease and the grant of a new one is generally treated as a disposal of the old lease and an acquisition of a new lease. The “consideration” for the disposal is the market value of the new lease. The market value of the new lease is essentially the difference between the value of lease after the extension (which is expected to rise), and the value of lease under current lease terms (which is generally lower, given the lower lease terms remaining).
However, leaseholders may claim Private Residence Relief (PRR) under section 222 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), provided the property being extended is, and has been, their only or main residence. The gain may fully or partially be exempt depending on whether the property has always been main residence or only for a certain limited period.
In certain circumstances, Extra-Statutory Concession D39 (ESC D39) may also apply. Where all of the following conditions are satisfied, the transaction will not be treated as a disposal for CGT purposes:
Where ESC D39 applies, the new lease is treated as acquired on the same date as the original lease, preserving the original acquisition date and deferring any CGT exposure. However, if the concession does not apply, a chargeable gain may arise based on the market value of the new lease relative to the cost of the original lease.
In the case of a lease surrender and regrant, the leaseholder is deemed to dispose of and acquire a new asset. The chargeable gain is calculated as the difference between the market value of the property following the lease regrant and the value under the original lease terms, i.e. the value of new lease. As the leaseholder held the original lease at negligible or no cost, the value of new lease is treated as a gain.
Example
Mr Kit holds a leasehold interest in a flat with 90 years remaining. The market value of the lease on these existing terms is £90,000. He agrees with the freeholder to extend the lease to 999 years, resulting in a new lease value of £350,000.
If ESC D39 does not apply, the lease extensions is treated as a part-disposal and re-acquisition. As the original lease was held at negligible cost, the full uplift in value is treated as a capital gain:
As it is assumed that Mr Kit initially held the lease at negligible value, the value of new lease will be the capital gains before relief.
Depending on his circumstances, Mr Kit may be eligible for Private Residence Relief under section 222 of TCGA 1992, which could reduce or eliminate the gain, provided the property is his main residence. In addition, he may be entitled to the Annual Exempt Amount of £3,000, provided this has not already been used against other gains in the same tax year.
Stamp Duty Land Tax (SDLT)
As stated above, the leaseholder will be subject to SDLT when the freeholder re-grants them the surrendered lease, whereas the freeholder will be subject to SDLT when the existing lease is surrendered to them. However, Paragraph 16 of Schedule 17A of the Finance Act 2003 provides that where there is a surrender of an existing lease and a simultaneous grant of a new lease between the same parties, then:
This rule applies regardless of whether the parties are connected or not.
As such, where no monetary premium is paid and the rent under the new lease is a peppercorn, the chargeable consideration is nil, meaning that no SDLT liability arises on either transaction.
However, where the leaseholder pays premium (and/or rent) on the new lease, SDLT may apply on the transaction.
Tax Implications to the Freeholder
The grant of a lease is treated as a part disposal of the superior interest (e.g. freehold or head lease) from which the lease is derived. In the absence of any specific provisions, a lease premium is treated as a capital payment by the tenant and a capital receipt for the landlord. Accordingly, the grant of a lease is considered a wholly capital transaction for tax purposes.
Under section 21(2) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), the grant of a long lease out of an existing long leasehold or freehold interest constitutes a part disposal of the original asset.
Where an existing lease is surrendered and regranted—often as part of a lease extension—the superior landlord (freeholder or head lessor) is treated as:
This triggers a chargeable gain for the freeholder.
Since the freeholder may be retaining certain value in the property, the allowable cost (from the base case) will be calculated using the part disposal formula:
Allowable costs = Original acquisition and improvement costs × A / (A + B)
Where:
- A = Premium or consideration received for the new lease;
- B = Value of the retained interest, including the right to receive rent under the new lease.
Example
Continuing from the earlier scenario involving Mr Kit, assume that Mr Tusk is the freeholder of the property. When Mr Kit surrenders his lease and is granted a new 999-year lease, Mr Tusk is treated as:
Calculation of Chargeable Gain for Mr Tusk
Particulars | Amount (£) |
|---|---|
Market value with new 999-year lease | 350,000 |
Less: Value of lease on existing terms | (90,000) |
Chargeable gain | 260,000 |
In this example, it is assumed that the retained interest is negligible (e.g. no meaningful right to receive rent under a 999-year lease), meaning A / (A + B) = 1 for the part disposal formula. Thus, all allowable costs are attributed to this disposal.
Special Cases – Freeholder and Leaseholder Are Connected
It is not uncommon to encounter arrangements where the freeholder and leaseholder are connected parties. As the same legal person cannot hold both the freehold and leasehold interests in a property, landlords often hold the freehold title through a company, while the leasehold interest is held in their personal name. The property may then be rented out or occupied by the leaseholder.
In such scenarios, when the lease is extended, it is typically done at a peppercorn rent and without any premium. This arrangement can give rise to further tax implications, particularly where the freeholder is a close company, i.e. a company with less than 5 shareholders or where the shareholders are the company directors.
i) Section 455 Charge – Close Companies: Loans to Participators
Under section 455 of the Corporation Tax Act 2010, if a close company makes a loan or advances to a shareholder or directors or anyone connected to them, the company becomes liable to a tax charge equivalent to corporation tax on the value of that loan. For the 2025/26 tax year, the applicable rate is 33.75%, aligned with the dividend upper rate.
This charge applies not only to direct loans but also in circumstances where:
Where a company (acting as freeholder) grants a long lease to a shareholder, director, or other connected party (i.e. the leaseholder), and no market value premium is paid, the market value of the lease may be treated as a loan to the leaseholder. If this loan is not repaid within nine months of the end of the accounting period, the company may become liable for a section 455 tax charge.
ii) Dividend Tax – Distribution Rules
Under section 1020 of the Corporation Tax Act 2010, where a company transfers an asset to one of its members and the value of the benefit exceeds the consideration provided, the excess is treated as a distribution (or dividend) and taxed accordingly in the hands of the recipient.
Where a company grants a lease to a shareholder or other connected party for less than its market value, the difference between the lease’s market value and the actual consideration paid is treated as a distribution. This amount is taxable as dividend income to the leaseholder.
For UK-resident leaseholders, the dividend tax rates apply depending on the individual’s income tax position: 8.75%, 33.75%, or 39.35%. If the leaseholder is non-UK resident, dividend tax is not applicable.
However, HMRC may argue that the benefit arises by reason of employment, in which case it may be subject to income tax at 20%, 40%, or 45%, along with National Insurance contributions for both the company and the leaseholder.
It is important to note that either the section 455 loan charge or the dividend income tax charge may apply to the transaction—but not both. The appropriate tax treatment depends on the facts and how the transaction is structured and recorded. HMRC will consider the substance of the arrangement:
iii) Capital Gains Tax and Stamp Duty Land Tax
Where the leaseholder and freehold are connected parties, the transaction is deemed to take place at the market value for CGT purposes. Therefore, even if the arrangement takes place at peppercorn rent and no premium, the market value of leases will be taken for the calculation. If ESC D29 applies, no such consideration is necessary.
For SDLT purposes, the surrender and regrant will be outside its scope under the sale and leaseback relief.
Conclusion
Extending a lease is often a strategic move to preserve or increase a property's value, improve its marketability, and avoid rising costs associated with short leases. However, lease extensions—particularly those involving surrender and regrant—carry significant tax implications that must not be overlooked.
For leaseholders, the key considerations are Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). While reliefs such as Private Residence Relief or Extra-Statutory Concession D39 may mitigate exposure, each case requires careful review to determine the correct tax treatment. For freeholders, especially where the interest is held through a company, the grant of a new lease can trigger chargeable gains, and where the leaseholder is a connected party, further complexity arises under Section 455 (loans to participators) and dividend tax rules.
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Frequently Asked Questions
It depends on how the lease is extended. If you extend the lease under the statutory route and pay a premium, there may be no immediate tax liability. However, where a lease is extended by surrender and regrant, the leaseholder may be liable to Capital Gains Tax (CGT) on the surrender of the old lease and Stamp Duty Land Tax (SDLT) on the new lease, depending on the circumstances.
The surrender of the existing lease is treated as a disposal for CGT purposes, while the grant of the new lease is treated as an acquisition. If the property is the leaseholder’s main residence, Private Residence Relief (PRR) may apply to reduce or eliminate any gain. SDLT may also be due on the new lease if a premium or rent is payable, although certain reliefs may apply.
Marriage value applies when a lease has 80 years or less remaining at the time of extension. It reflects the increase in the property’s value resulting from the lease extension and forms part of the premium payable to the freeholder. If the lease is extended while more than 80 years remain, marriage value is deemed to be nil.
Yes. Where a close company grants a lease to a director, shareholder, or connected party at less than market value, this may be treated as either:
- A loan to participator under section 455 CTA 2010, or
- A distribution (dividend) under section 1020 CTA 2010.
- Employment income
Only one treatment applies, and HMRC will consider the substance of the arrangement to determine which.
SDLT may apply on the grant of a new lease where consideration is given in the form of a premium or rent. However, where the lease is extended through a surrender and regrant with no premium and a peppercorn rent, and both transactions occur simultaneously, no SDLT is payable under Paragraph 16 of Schedule 17A FA 2003, due to sale and leaseback relief.
In certain circumstances, yes. For example, Extra-Statutory Concession D39 (ESC D39) may apply where a lease is extended on arm’s length terms, covering the same property, and with no significant changes other than rent and term. Where the concession applies, the transaction is not treated as a disposal for CGT purposes. However, the freeholder will still be subject to the capital gains tax.
Extending the lease while more than 80 years remain avoids the marriage value premium, making the extension significantly cheaper. It also helps maintain or increase the property’s value, improves remortgaging options, and makes the property more attractive to future buyers.
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