The outcome depends on the structure, lease terms and whether any premium or other consideration is involved. In most standard cases such as nil-premium or peppercorn extensions, income tax is not usually triggered. This guide focuses on SDLT, Corporation Tax and CGT only. For lease drafting, registration or any income tax implications from non-standard arrangements, specialist legal and tax advice is essential.
Key Takeaways
What Share of Freehold Means & Why the Lease Still Matters
Buying a share of the freehold gives flat owners collective control of the building, usually through a limited company that owns the freehold. But it does not remove the individual leases. Each flat still has its own leasehold title, and the lease term continues to run down even if the leaseholder also owns a share in the freehold company.
That is why many shares of freehold flats still need lease extensions. A short lease can affect mortgageability, resale value and buyer confidence. The usual legal solution is for the freehold company, as landlord, to grant a much longer lease, often 999 years at a peppercorn rent. Legally, that may look simple; for tax, it can be much more complicated.
SDLT on a Share of Freehold Lease Extension: The Trust Question
The first question to resolve before any lease extension is granted is whether the freehold company holds its asset absolutely or on trust for the leaseholders.
If the freehold is held on trust for the leaseholders
However, “no premium” does not automatically mean “no SDLT risk”. Chargeable consideration can include money or money’s worth, such as debt release, works, services or other property. The trust or nominee documents and the lease extension terms should therefore be checked before assuming no SDLT arises.
If the freehold is not held on trust, SDLT applies on market value
Market value is not a fixed percentage. It is calculated using valuation methods that take into account factors like deferment rates, capitalisation rates and sometimes marriage value. In practice, premiums often fall around 8% to 15% of the flat’s value, but this depends on the property, lease length and comparable evidence.
SDLT is then charged on the resulting premium at standard residential rates, with higher rates applying if the buyer already owns another property. This means SDLT can arise even where no cash is paid, simply because the transaction is treated at market value rather than the agreed figure.
How to Check Whether a Trust Exists
The strongest evidence of a trust is an express declaration of trust: a deed confirming that the freehold company holds the freehold as nominee or trustee for the leaseholders and their successors. This is usually put in place when the freehold is first purchased, alongside the participation agreement.
If there is no deed, it does not automatically mean there is no trust. A trust may still be shown through other evidence such as company accounts that do not treat the freehold as a company asset, board resolutions setting out the original intention, or the wording of the participation agreement. However, if a trust cannot be clearly proven, the safest approach is to put a deed in place before any lease extensions are granted.
The trust structure is important for SDLT because a bare trust is effectively ignored. Where the freehold company holds the property as a bare trustee or nominee, the leaseholder is treated as the real owner for tax purposes. This means there is no actual acquisition when a lease is extended, so SDLT does not arise. The key point is that it is the trust structure itself that removes the charge, not simply having a nil premium.
Corporation Tax & CGT in the Freehold Company: The Part Disposal Trap
Why is Granting a Lease a Part of disposal
The tax rate depends on the company’s status. Close investment holding companies pay the main corporation tax rate on gains, while most property companies are excluded if they mainly let property commercially. However, this can be restricted where property is let to connected persons. In some properly structured cases where the company acts as a bare trustee or nominee, the gain may belong to the beneficiaries instead of the company.
How the Gain is Calculated
The grant of a long lease out of a freehold can be a part disposal for capital gains purposes. The allowable cost is normally apportioned using the formula: original cost × A ÷ (A + B), where A is the value of the interest disposed of, and B is the value of the interest retained.
Where the market value rule applies, A may be based on the market value of the lease granted, even if no cash premium is paid. The retained reversion after a 999-year peppercorn lease may have limited value, but this should be supported by valuation evidence before assuming how much of the original freehold cost is available against the gain.
Worked example: Delayed lease extension
Six flat owners bought the freehold of their building through a company in June 2015 for £500,000. The company owns the freehold outright, not as nominee or trustee. In 2026 it grants each flat owner a new 999-year lease. Assume the lease interests granted are worth £800,000 in aggregate and the retained reversion is worth next to nothing, so effectively the whole £500,000 cost attaches to what's disposed of.
Because the leases go to shareholder-tenants, the market value rule can apply: the company is treated as disposing of the lease interests at market value even though no cash premium is paid.
Calculation item | Amount |
|---|---|
Deemed disposal proceeds (market value of lease interests granted) | £800,000 |
Less: allowable cost under part-disposal rules | (£500,000) |
Less: indexation allowance | (£37,000) |
Illustrative Chargeable gain | £263,000 |
Corporation Tax at 25% (assuming the main rate applies) | £65,750 |
The key issue is that even with no cash premium, a tax bill can still arise. This can leave the company owing tax without having received money to pay it, meaning flat owners may need to fund it through loans or capital contributions. This is one of the main reasons a proper trust or nominee structure is used to avoid this outcome.
The Timing Solution: Extend Immediately on Acquisition
If the freehold company grants 999-year leases shortly after acquiring the freehold, the market value of those leases may be close to what was just paid for the freehold. A part disposal still occurs, but an early grant may reduce or even eliminate any chargeable gain, depending on the valuation evidence, allowable costs, and the specific facts.
This timing can be an important tax planning point. Where lease extensions are expected, advisers often coordinate the timing of the freehold purchase and the lease grants. Delaying the extensions can increase the risk of a taxable gain if property values rise or if the value of the leases granted exceeds the cost that can be attributed to the disposal.
Close Company Rules: The Risk for Freehold Companies
A below-market lease grant is not treated as a loan, so the close company loan charge does not automatically apply. The key rule to watch is s 464A, but it only applies where there are tax avoidance arrangements designed to secure a tax advantage or avoid the loan charge. If it applies, it is a Corporation Tax charge on the company at 33.75%, rising to 35.75% from 6 April 2026.
A more common issue can arise without any avoidance motive. If a company transfers value to a participator below market value, the difference can be treated as a distribution. This is based on market value minus any amount paid, and it is taxed on the individual as dividend income rather than as an extra Corporation Tax charge on the company.
For example,
If a freehold company grants six director-shareholders 999-year leases at nil premium and each lease has a market value of £40,000, HMRC could treat this as value transferred to participators. If s 464A applied, the potential charge would be £13,500 per lease, or £81,000 in total, depending on valuation and facts.
How to reduce the exposure
The tax risk is usually lowest where the structure is dealt with before the lease extensions are granted. This may include using a properly documented trust or nominee arrangement, granting leases at market value, or extending soon after the freehold is acquired so that any uplift in value is limited.
The key is to avoid an undocumented, below-market transfer of value from the freehold company to its shareholder-tenants. If the company owns the freehold outright and the leases cannot be granted at market value, professional tax advice should be taken before the extensions are completed.
Tax planning for BTL investors with a share of freehold
The considerations above apply equally to buy-to-let investors who hold a flat through a freehold company. Where the property is a rental investment rather than a main residence, neither the individual flat owner nor the freehold company can benefit from Private Residence Relief.
Extending immediately: the optimal approach for BTL investors
Timing makes a real difference here. If the freehold company grants the lease extensions straight away when it buys the freehold, there’s usually no gain and no tax to worry about. If it delays, the value of the lease can shift, and when the extension is eventually granted, the company may end up paying Corporation Tax of up to 25% on any gain. In practice, people often delay simply because they don’t have the cash available at the start.
When the flat is eventually sold, any gain is taxed on the individual at 18% or 24% depending on their tax band, and the tax has to be reported and paid within 60 days of completion. The same rates can apply if you sell your shares in the freehold company, since reliefs for business assets don’t apply to residential freeholds. The key takeaway is to think about lease extension timing early, run the numbers if you’re delaying, and keep that 60-day deadline in mind.
Premium paid to an absent Co-freeholder
If you have to pay an absent co-freeholder to get your lease extension over the line, that cost might help reduce your future Capital Gains Tax, but it’s not guaranteed. It only works if it clearly counts as part of improving your lease and is still reflected in the property when you sell.
Paying for a 999-year extension is usually easier to justify as a legitimate cost. The risk comes if HMRC sees the payment more like buying someone out of their share of the freehold rather than paying for the lease itself. In that case, they may challenge it. The safest approach is simple: keep clear records, make sure the payment is properly documented, and ensure the legal paperwork clearly links it to the lease extension.
Checklist for BTL investors with a share of freehold
Before extending the lease, check the key tax risks:
Frequently Asked Questions
A share of freehold does not remove the lease. You still own a leasehold interest because flats need leases to define ownership, boundaries, and rights within the building. The freehold is usually owned jointly through a company, but the lease remains the legal title for each flat.
No. A share of freehold is generally positive because it gives leaseholders control over the building and lease extensions. However, it still involves legal and tax complexity, especially if the freehold is held through a company. The structure needs to be checked properly, not avoided.
If a lease expires, ownership of the flat returns to the freeholder. This can make the property unsellable and extremely difficult to mortgage. In practice, lease extensions are done well before expiry to avoid this outcome.
A share of freehold is usually worth more because it removes ground rent risk and gives control over lease extensions. However, the value uplift depends on the lease length, building condition, and market demand. Short leases gain the most from share of freehold status, while long leases show a smaller difference.
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