Leasehold reform is often described as a straightforward win for flat owners: cheaper freehold purchases, longer leases, and the end of onerous ground rents. What rarely gets mentioned is that the tax rules sitting underneath these reforms have not changed, and this creates real, sometimes unexpected, liabilities for leaseholders and freehold companies alike. This guide looks at what leasehold reform actually changes, why extending a lease can trigger a tax bill even when no premium is paid, and how UK Property Tax Accountants can help leaseholders navigate the process without an accounting surprise.
What Is Leasehold Reform Actually Changing?
The Leasehold and Freehold Reform Act (LAFRA) 2024 is built around one principle: the people who live in a building should control it, rather than a third party freeholder. In practice, this means it should become cheaper and easier for leaseholders to buy their freehold collectively, extend their leases to 990 years with a peppercorn ground rent, and eventually move towards commonhold ownership
Key elements of the reform include leaseholders paying only their own legal and valuation costs rather than the freeholder’s, the removal of marriage value for leases with 80 years or fewer remaining, and a cap on ground rent within the valuation calculation set at 0.1% of the property’s value. The government is also consulting, between July and September 2026, on the precise valuation rates and process cost rules that will apply once the reform is implemented.
However, most of these headline changes are not yet in force. Implementation depends on secondary legislation to set the valuation rates, a forthcoming Commonhold and Leasehold Reform Bill to fix technical flaws in the 2024 Act, and the outcome of an ongoing legal challenge from freeholders, which the government won at the High Court in October 2025 but which remains under appeal. Industry commentary suggests full implementation is realistically still around two years away.
Why a Lease Extension Can Trigger a Tax Charge
For tax purposes, a lease extension is treated in law as the surrender of the old lease and the grant of a brand new one, a principle confirmed in Friends Provident Life Office v British Railways Board. HMRC’s Capital Gains Manual (CG70800) treats the grant of that new lease as a part disposal of the freehold for Capital Gains Tax purposes.
Where the freeholder and leaseholder are unrelated parties dealing on commercial terms, this is a simple, low risk transaction. The complexity arises after collective enfranchisement, where leaseholders buy the freehold through a shared company and then extend their own leases. Because the leaseholders and the freehold company are connected persons under section 18 of the Taxation of Chargeable Gains Act (TCGA) 1992, the market value rule in section 17 overrides the price actually paid. This means HMRC can treat a 990 year lease extension granted for no premium and a peppercorn rent as a disposal at full market value, creating a taxable gain even though no cash has changed hands.
If the freehold company owns the building beneficially, that deemed disposal can trigger a Corporation Tax charge on a gain it never actually received in cash. The company then needs to recover that cost from the leaseholders it serves; if it does not, HMRC may treat the value passed to the leaseholder as either a loan to a participator, potentially triggering the section 455 charge (33.75% for 2025/26), or as a distribution under section 1020 of the Corporation Tax Act 2010.
A Worked Example
Consider four flat owners in a converted Victorian house who together own the freehold company. Their leases have fallen to 87 years, worrying mortgage lenders, so they agree to extend all four to 990 years at no premium. Each extension lifts the flat’s value by roughly £30,000.
Because the company owns the freehold beneficially and the owners are connected persons, HMRC treats each grant as a market value disposal. The outcome depends entirely on structure and occupation status.
| Scenario | Tax Treatment | Likely Outcome |
|---|---|---|
| Freehold held beneficially by the company | Corporation Tax on the deemed gain per flat | Charge on cash never received |
| Investor owner, no Private Residence Relief | Capital Gains Tax at 24% on the gain, less the annual exempt amount | Around £6,480 on a £30,000 gain |
| Owner occupier | Private Residence Relief / Extra Statutory Concession D39 | Usually £0 |
| Freehold held on trust, leases extended immediately after purchase | Reversion has little or no value at the point of extension | Charge close to zero |
The gap between these outcomes, several thousand pounds per flat versus nothing at all, comes down entirely to how the freehold is held and the timing of the extension.
Structuring the Freehold Correctly
The single biggest lever available to leaseholders is deciding, before completion, whether the freehold will be held beneficially by the company or on trust for the individual leaseholders. Holding it on trust, supported by a properly drafted deed of trust and participation agreement, generally keeps the eventual lease extensions outside the connected persons trap that applies to a beneficially owned company.
Timing matters just as much as structure. Extending leases immediately after the freehold acquisition, while the reversion still carries little value, keeps any deemed gain close to zero. Delaying extensions allows the reversion to appreciate, which increases the market value being transferred and can turn what should have been a tax neutral internal reorganisation into a five figure liability across a block.
Owner occupiers should also check whether they qualify for Private Residence Relief under section 222 of TCGA 1992, and whether Extra Statutory Concession D39 removes the surrender of the old lease from charge. It is worth noting this concession protects the leaseholder surrendering their existing lease, but it does not protect the freehold company when it grants the new one.
Stamp Duty Land Tax Considerations
A lease extension granted for no premium and only a peppercorn ground rent will usually not attract Stamp Duty Land Tax, because a peppercorn rent is not chargeable consideration under the Finance Act 2003, as confirmed in HMRC’s Stamp Duty Land Tax Manual (SDLTM11010). That said, an SDLT return may still be required unless the premium is under £40,000 and the rent’s net present value is below £1,000. Any UK residential capital gain arising on the transaction generally still needs to be reported and paid to HMRC within 60 days.
Where Commonhold Fits In
Converting a leasehold building to commonhold could trigger both Capital Gains Tax and SDLT, since the process typically involves acquiring or restructuring the freehold and replacing existing leases with commonhold titles. Neither the current LAFRA 2024 nor the draft Commonhold and Leasehold Reform Bill provides specific tax reliefs or detailed guidance on how these conversions should be taxed, and the government has confirmed the Bill will only be introduced in the 2026/27 parliamentary session, with a cap on older ground rents at £250 a year, tapering to a peppercorn after 40 years. Until legislation and HMRC guidance catch up, the tax treatment of commonhold conversion should be treated as uncertain, and specialist advice should be sought before proceeding.
How UK Property Tax Accountants Can Help
Leasehold reform is changing the legal landscape faster than the tax rules that sit beneath it, and getting the structure or timing wrong at the outset can turn a straightforward freehold purchase into an unexpected five figure tax bill. UK Property Tax Accountants works with leaseholders, resident management companies, and freehold companies to plan these transactions correctly from day one.
- Reviewing whether a freehold should be held beneficially by a company or on trust for leaseholders, and drafting the accompanying deed of trust and participation agreement structure
- Advising on the timing of lease extensions to minimise deemed market value gains under TCGA 1992 sections 17 and 18
- Calculating Capital Gains Tax exposure for investor owned flats and confirming Private Residence Relief or ESC D39 eligibility for owner occupiers
- Assessing Corporation Tax exposure for resident owned freehold companies, including section 455 and distribution risks under CTA 2010 section 1020
- Confirming SDLT filing obligations, including cases where no tax is due but a return is still required
- Advising on the tax implications of moving from leasehold to commonhold ahead of firmer HMRC guidance
- Handling the 60 day reporting and payment of any UK residential property capital gain
- Providing ongoing accounting support for resident management companies and right to manage companies
Frequently Asked Questions
Does leasehold reform mean flat owners will not pay tax on their freehold?
Not necessarily. The reform changes the legal cost and process of buying a freehold or extending a lease, but the existing Capital Gains Tax, Corporation Tax and SDLT rules still apply in full
Why would extending my own lease trigger a tax charge if I did not pay a premium?
Because the law treats the transaction as a part disposal of the freehold at market value when the leaseholder and freeholder are connected persons, regardless of the price actually charged.
When will the leasehold reforms actually take effect?
The government opened consultations on valuation rates and process costs in July 2026, both closing in September 2026, with full implementation realistically expected around two years away once the Commonhold and Leasehold Reform Bill passes.
Will converting to commonhold create a tax bill?
It could, since the process can involve restructuring the freehold and replacing leases with commonhold titles, but no commonhold specific tax relief currently exists.
