Ask the Experts: Will I pay income tax or capital gains tax on cash I got for extending a lease?

David Wesley-Yates
18 August 2017

Q

I am the freeholder of a terraced house that has been converted into two flats. I live in the upstairs flat. My neighbour downstairs had only 70 years remaining on his lease, so he paid to extend it. I received £37,000 from the sale of that lease extension.

Will I have to pay income tax or capital gains tax (CGT) on the money.  And if so, how much?

I currently pay income tax through the PAYE scheme as a regular salaried employee. If I do owe tax, do I need to fill out a self-assessment form?

From
JG/London

A

Income tax will not be due, but I’m afraid you will owe CGT on the money you have received.

When a landlord grants a lease, he or she is treated as making a part disposal of his or her interest in the property, which is subject to a special calculation in assessing the capital gain. This means you are able to deduct part but not all of the cost of the property, together with any professional fees incurred in negotiating the lease. The sums around this can be complicated, so it is worth speaking to a tax adviser to clarify exactly how much you can deduct.

You are entitled to an annual CGT allowance of £11,300 for this tax year, and if you are married, or in a civil partnership and the property is in both your names you can use your partner’s CGT allowance too.

You will need to complete a self-assessment tax return and pay the tax by 31 January following the end of the tax year of the extension of the lease. If the lease was extended in the year ending 5 April 2018, you will have to do this by 31 January 2019.

David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.