Does Leasehold Reform Mean You’ll Pay Tax to Own Your Freehold?

You and your neighbours are finally taking control of your building. You buy the freehold together, extend everyone's lease to 999 years, and nobody pays a premium. It all feels tax-neutral. Then a Corporation Tax bill lands on the freehold company!

This is the side of leasehold reform almost nobody explains, and it is the single most common problem flat owners bring to us. Leasehold reform hands control of your building to you, but it does not hand you a tax exemption. When leaseholders buy their freehold and grant themselves longer leases, HMRC can treat that grant as a disposal at market value between connected persons, creating a real tax charge even when no cash moves.

What May Leasehold Reform Actually Change?

Leasehold reform is expected to make it easier and cheaper for leaseholders to buy their freehold collectively, extend their leases and, over time, move towards commonhold ownership. However, while many people focus on the legal changes, the tax rules governing these transactions remain largely unchanged.

The government's reforms, under the Leasehold and Freehold Reform Act (LAFRA) 2024 and the proposed Commonhold and Leasehold Reform Bill, are built on the principle that the people who live in a building, rather than a third-party freeholder, should control it. In practice, that means more leaseholders buying their freehold together through collective enfranchisement before extending their leases, often to 999 years.

Many of the headline reforms, including the new 990-year lease extension and the abolition of "marriage value," are contained in LAFRA but have not yet been brought into force. The government expects to consult on the valuation rates during 2026 and must introduce further legislation to address technical issues before these provisions can commence. Meanwhile, the King's Speech 2026 announced a Commonhold and Leasehold Reform Bill for the 2026/27 parliamentary session, with the aim of making commonhold the default tenure and banning most new leasehold flats. That Bill, however, has not yet become law.

For tax purposes, though, the key point is that the existing rules apply. Regardless of when these reforms take effect, buying a share of the freehold or extending a lease can trigger Capital Gains Tax, Corporation Tax, SDLT and other tax consequences under the current legislation.

Why Does Extending My Own Lease Trigger A Tax Charge?

Extending your own lease can trigger a tax charge because the law treats the transaction as the surrender of your existing lease and the grant of a new one. If you also own or control the freehold, the tax rules generally treat the new lease as being granted at market value, even when no premium is paid.

This surprises many leaseholders because a lease extension often feels like an internal administrative exercise rather than a sale. Legally, however, it is a surrender of the old lease and the grant of a new one. This was clarified in the case Friends Provident Life Office v British Railways Board [1991]. For Capital Gains Tax purposes, the grant of that new lease is then treated as a part-disposal of the freehold, as stated in the HMRC Capital Gains Manual CG70800.

That treatment is straightforward where the freeholder and leaseholder are unrelated parties negotiating on commercial terms. The tax consequences become far more complex when the leaseholders extending their leases also own the freehold, whether directly or through a company. In those circumstances, the market value rules can apply even if no money changes hands, creating tax liabilities that many owners do not anticipate.

Who Counts As A "Connected Person" for Lease Extension & Why Does It Matter?

If you and your neighbours own or control the company that owns the freehold, you are generally treated as connected persons for Capital Gains Tax purposes. This matters because HMRC can ignore the price you actually paid and instead treat the transaction as taking place at its full market value, creating tax liabilities even where no cash changes hands.

This issue commonly arises after collective enfranchisement, when leaseholders acquire the freehold through a company and then begin extending their own leases. Because the leaseholders and the freehold company are connected under the Taxation of Chargeable Gains Act (TCGA) 1992 s.18, the market value rule in TCGA 1992 s.17 overrides the actual consideration. As a result, even if the company grants a 990-year lease for no premium and only a peppercorn ground rent, HMRC can treat the company as having disposed of part of its freehold at full market value.

Where the company owns the freehold beneficially, that deemed disposal can create a chargeable gain, leaving the company with a Corporation Tax liability despite receiving no cash from the lease extension. In practice, the company must recover that tax cost from the participating leaseholders. If it does not, HMRC may treat the value transferred to the leaseholder as either a loan to a participator, potentially triggering a charge under the s.455 rules (33.75% for 2025/26), or as a distribution under the Corporation Tax Act (CTA) 2010 s.1020.

This is why lease extensions within resident-owned freehold companies require careful tax planning. What appears to be a straightforward internal reorganisation can instead become a "money for nothing" trap, with tax arising on a market value gain that no one has actually received in cash.

How Do You Take Your Freehold Without the Surprise Bill?

By structuring the freehold correctly from the outset and extending the leases as soon as the freehold is acquired. Specifically, this means deciding who will beneficially own the freehold and when the lease extensions should take place.

The freehold should generally be held on trust for the leaseholders as the beneficial owners, supported by a properly drafted deed of trust alongside the participation agreement, rather than being beneficially owned by the company itself. The lease extensions should then be completed immediately after the freehold acquisition, while the reversion still has little or no value. Delaying the extensions until years later allows the reversion to appreciate, increasing the market value of the rights being transferred and potentially turning what could have been a tax-neutral exercise into a significant tax liability.

Owner-occupiers should also confirm whether they qualify for Private Residence Relief under TCGA 1992 s.222 and whether Extra-Statutory Concession D39 (CG71240) removes the surrender of the existing lease from charge. However, it is important to remember that ESC D39 applies only to the leaseholder surrendering the old lease. It does not protect the freehold company when it grants the new lease.

Finally, SDLT should not be overlooked. A lease extension granted for no premium at a peppercorn ground rent will usually not give rise to Stamp Duty Land Tax (SDLT) under the Finance Act (FA) 2003 because a peppercorn rent is not chargeable consideration, as provided in the Stamp Duty Land Tax Manual SDLTM11010. Even so, an SDLT return may still be required unless the premium is less than £40,000 and the rent's net present value is below £1,000. Taking advice before completing the transaction can help ensure the structure achieves its intended tax outcome and that all reporting obligations are met.

What About Converting to Commonhold?

Converting a leasehold property to commonhold could trigger both CGT and SDLT, but the tax position remains uncertain because the government has not yet introduced any commonhold-specific tax reliefs or published detailed guidance.

As commonhold moves higher up the government's leasehold reform agenda, more leaseholders may consider converting their buildings. The process generally involves acquiring the freehold and replacing the existing leases with commonhold titles. On general tax principles, those transactions could give rise to both CGT and SDLT.

However, despite the government's plans to expand commonhold, neither the proposed Commonhold and Leasehold Reform Bill nor HMRC's published guidance on the matter explains how the tax consequences of conversion should be calculated in practice. Nor has the government proposed any tax relief specifically designed to prevent unexpected liabilities during the conversion process.

Until the legislation and HMRC provide greater clarity, the tax treatment of commonhold conversions should be regarded as uncertain. Anyone considering a conversion should obtain specialist tax advice before proceeding.

Conclusion: What Should You Do Before You Enfranchise or Extend?

If your building is heading towards buying its freehold, extending leases, or converting to commonhold, the structure you choose decides whether the tax is thousands of pounds or nothing at all. This is not a question a conveyancer or an online calculator can answer.

The surrender-and-regrant analysis is fact-specific, the connected persons rules are unforgiving, and the money at stake runs into five figures per block. Get the ownership structure and the timing right at the start and the charge is often avoidable. Get them wrong and it is usually too late to fix once the leases are granted. The reforms are meant to make owning your home cheaper and simpler. Make sure the tax doesn't quietly undo the saving.