For a leaseholder, the premium paid to extend a lease and the professional fees that go with it are capital. They cannot be deducted from rental income, but they form part of the cost of the lease for Capital Gains Tax when it is sold. For the landlord, a premium received for an extension that leaves a lease of more than 50 years is wholly capital and is taxed as a part disposal of the freehold; only where the new lease is 50 years or less is part of the premium taxed as property income.

What happens legally when a lease is extended?

Most residential extensions in England and Wales are made under section 56 of the Leasehold Reform, Housing and Urban Development Act 1993. A qualifying tenant of a flat who serves notice under section 42 of that Act is entitled, on paying the premium worked out under Schedule 13, to a new lease at a peppercorn rent for a term expiring 90 years after the term date of the existing lease. The new lease is granted in substitution for the old one. GOV.UK also notes that the owner of a house may qualify for a 50 year extension, and that the cost of extending rises sharply once 80 years or less remain.

The tax analysis follows the legal form. HMRC’s Capital Gains Manual at CG71240 explains that extending a lease outside its original terms involves the surrender of the old lease and the grant of a new one. A surrender is a disposal by the tenant to the holder of the immediately superior interest (CG71230). Two separate sets of rules then apply: one for the leaseholder who pays and one for the landlord who receives.

Section 60 of the 1993 Act also makes the tenant liable for the landlord’s reasonable costs of investigating the claim, valuing the flat to fix the premium and granting the new lease. These sums are part of what the leaseholder pays for the extension, and they need the same capital treatment as the premium itself.

Can a leaseholder who lets the flat deduct the cost from rent?

No. The premium buys a longer interest in the property, which is a capital asset. HMRC’s Property Income Manual at PIM2120 says professional fees are capital if they relate to a capital matter, and that where a long lease replaces a short lease the legal and other costs are capital, being analogous to an improvement of the landlord’s asset. GOV.UK’s list of allowable expenses for landlords allows legal fees only for lets of a year or less or for renewing a lease for less than 50 years, which does not cover a statutory extension.

There is a narrow relief for premiums paid by a tenant who sublets, in section 292 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). PIM2240 explains that it works by treating the amount on which the superior landlord is taxed as income as extra notional rent, spread over the head lease. Because a statutory extension produces a lease well over 50 years, none of the premium is taxed on the landlord as income, so there is nothing for the leaseholder to spread. In practice the buy to let leaseholder gets no income tax relief at all and must carry the cost forward to the eventual sale. See capital versus revenue expenditure and legal and professional fees for the wider rules.

How is the extension treated for Capital Gains Tax when the leaseholder sells?

Strictly, the surrender of the old lease is a disposal with the value of the new lease as consideration. Extra statutory concession D39, described at CG71240, lets the leaseholder treat the surrender and regrant as no disposal if they wish, provided all of these conditions are met:

  • the terms are equivalent to those unconnected parties would agree at arm’s length;
  • the transaction is not part of a larger scheme or series of transactions;
  • the tenant receives no capital sum;
  • the property covered by the new lease is the same as under the old lease;
  • apart from duration and rent, the terms of the new lease do not differ from the old, ignoring trivial differences.

Where the concession applies, the extended lease is treated as acquired when the original lease was acquired. The concession applies only to the lessee, not the landlord.

On a later sale, section 38 of the Taxation of Chargeable Gains Act 1992 (TCGA) allows the consideration given for acquiring the asset, enhancement expenditure and the incidental costs of acquisition, which include the fees of a surveyor, valuer or legal adviser. The extension premium, your own solicitor’s and valuer’s fees and the landlord’s costs you reimbursed under section 60 belong in this calculation.

The extension can also change how the base cost is treated. CG71140 explains that a lease with 50 years or less to run at disposal is a short lease and a wasting asset, and CG71141 sets out how the allowable expenditure is written down under TCGA Schedule 8 paragraph 1. A flat sold after a 90 year extension will usually have well over 50 years left, so the wasting rules will not apply on that sale.

If the flat has been the owner’s only or main home throughout, private residence relief will normally cover the gain, as GOV.UK explains, so the extension cost has no tax effect. It becomes valuable where the flat was let or the relief is restricted, and then a 60 day property return may be needed after the sale.

How is the landlord taxed on the premium received?

The grant of a lease is a part disposal of the landlord’s freehold or superior lease (CG70800). Where the new lease runs for more than 50 years, CG70950 says the whole premium is consideration for the grant and the part disposal formula in TCGA section 42 applies. Cost is apportioned using A divided by (A plus B), where A is the premium and B is the value of the interest the landlord keeps, including the right to the rent.

Where the new lease is for 50 years or less, which is more common with commercial renewals than with statutory flat extensions, PIM1203 and PIM1205 apply. Part of the premium is taxed as property income in the year the lease is granted, under ITTOIA section 277 (section 217 of the Corporation Tax Act 2009 for companies). The taxable part is P x (50 minus Y) / 50, where P is the premium and Y is the number of complete 12 month periods in the lease other than the first. The rest of the premium is dealt with under the capital gains rules.

Two further points apply. A landlord carrying on a trade of dealing in property is taxed on the premium as a trading receipt, not under these rules (PIM1203). And a freehold owned by a residents’ company is taxed in the same way, through corporation tax on chargeable gains; see tax for residents’ management companies.

Can the landlord deduct its own costs?

The landlord’s costs of granting a long lease are capital. PIM2120 treats legal costs as revenue only for normal renewals of leases under 50 years, and even then not the part that relates to a premium. For a long extension, the landlord’s legal and valuation fees are deducted in the capital gains computation as incidental costs of the disposal, as in the example at CG70950. Costs recovered from the tenant under section 60 have not been borne by the landlord, so they should not be claimed.

What does this look like in numbers?

Illustration only. Priya owns a leasehold flat that she lets. She extends the lease under the 1993 Act, paying a premium of £20,000, her own legal and valuation fees of £3,000 and £2,000 of the landlord’s costs under section 60.

  • Rental profits: no deduction for any of the £25,000.
  • CGT on a later sale: if ESC D39 applies, the lease keeps its original acquisition date and the £25,000 is added to her allowable costs alongside what she originally paid.

Her landlord, Ben, bought the freehold years ago for £12,000. After the grant, his remaining interest, the reversion and the right to any rent, is valued at £5,000. His allowable cost is £12,000 x £20,000 / (£20,000 + £5,000) = £9,600. Assuming his own unrecovered legal fees are £1,000, his chargeable gain is £20,000 minus £9,600 minus £1,000, which is £9,400. The remaining £2,400 of his original cost stays with the freehold reversion for a future disposal.

Does Stamp Duty Land Tax apply to the premium?

An extension by surrender and regrant counts as a new transaction, so Stamp Duty Land Tax (Land Transaction Tax in Wales) has to be considered on the premium. HMRC’s SDLT Manual at SDLTM14090 explains that the treatment depends on whether a new lease replaces the old one and how the original lease was taxed. Any SDLT paid is a cost of transfer and so counts as an incidental cost of acquisition under TCGA section 38(2). See Stamp Duty Land Tax explained.

What are the common mistakes?

  • Claiming the premium or the solicitor’s bill as a rental expense because the flat is let.
  • Losing the paperwork, so the extension cost is missing from the CGT computation years later.
  • Applying the premium income formula to a 90 year extension. It applies only to leases of 50 years or less.
  • A landlord forgetting that receiving a premium for a long lease is a part disposal, not a tax free receipt.
  • Deducting costs the tenant has already reimbursed under section 60.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.