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Leasehold property explained

It’s a constant source of astonishment to those unfamiliar with the vagaries of British property law that millions of people quietly accept living with a house buying system which is – quite literally – feudal.

The distinction between freehold and leasehold property existed at least as far back as the Domesday Book of 1089. Land equalled wealth and power in the Middle Ages, and wealthy and powerful families wanted to be able to retain and monetise it. And so the concept of leasing swathes of land to peasant farmers for a set period of time, in return for a share of their crop or their labour, was born.

Today’s system has been refined, but the choice of leasehold vs freehold may still seem like a no-brainer. Who wouldn’t prefer the independence and security of a freehold?

Unfortunately, there are many places in which freehold apartments are a rarity. There are whole swathes of prime central London owned by Britain’s ancient, landed estates (like the Grosvenor Estate, which owns much of Mayfair and Belgravia), where leasehold is the only option going.

Before deciding which is better, leasehold or freehold, it’s therefore important to understand the system which has governed British property transactions for centuries, and which is currently facing a period of reform.

How does leasehold work?

The meaning of freehold property (usually a house) is that it’s bought and sold free and clear. The buyer owns both the property itself and the land upon which it stands, with no time limit or charges attached.

A leasehold property (usually a flat) is one which is bought only for a set period of time. During that time, an annual ‘ground rent’ must typically be paid to the leaseholder, sometimes just a few pounds, but often increasing over time to many thousands.

When the lease runs out, the property is forfeited back to the landlord – although in reality this rarely happens, because leases can be extended.

What is a ‘share of freehold’ property?

In some cases the owners of all the flats in a building co-own equal shares in the freehold. Typically, share of freehold homes are period conversions with only a small number of units, and sometimes the owners set up a company as an ownership vehicle for the freehold.

The owners are able to decide collectively how to manage issues like building maintenance. This can sometimes become fractious, but is usually considered preferable to being stuck under the control of a landlord.

The crucial benefit is that you can also extend your lease without paying a premium.

Because of this, share of freehold homes tend to be worth more than leasehold ones. The best share of freehold buildings are when owners collectively appoint a managing agent to help run and manage the building, collect service charges and have an adequate sinking fund in place to ensure the building is properly maintained overtime.

Extending a lease

How do I extend a lease?

Your first step when extending a lease should be to approach your freeholder to ask if they would be willing to negotiate an extension. They don’t have to say yes, but if they do you could save time and money. Saying that, you should always use a solicitor or surveyor to help you negotiate.

Once you have been the legal owner of a property for two years or more, you legally have the right to extend your lease, so in practice its rare for a freeholder not to agree to it.

What happens if you can’t agree on a price to extend a lease?

If your landlord won’t negotiate, or you can’t agree a price, you can go via a more formal route so long as you have been registered as the owner of the property (with the Land Registry) for at least two years.

This involves hiring a qualified valuer to establish how much you should pay, and serving a legal notice on your landlord. If you still cannot agree you might have to go to a legal tribunal, which will make an order on your behalf.

When do I need to start thinking about lease extensions?

The magic number here is 80. Most leases start off at 125 years (although there are exceptions). When it winds down to 80 years it becomes an issue – mortgage lenders might be unwilling to lend on properties with leases of less than 80 years and, crucially, this is the point at which extending a lease starts to cost more and more.

So leaseholders should ideally start to plan to extend their lease well before the 80 year mark.

The process is likely to take six months to a year.

How do you calculate the cost of extending a lease?

Lease extension cost depends on how much the property is worth, how long its lease is, and how much the ground rent is.

Put simply, the more expensive the property and the shorter the lease, the more it costs, which is why acting sooner rather than later is advisable.

Professional fees will add around £4,000 to £5,000 to your total bill, and you may also have to pay your freeholder’s costs.

If the property is a second home or investment property you may also need to pay Stamp Duty on the deal, although costs might be tax deductible – the rules are very complex so good professional advice is essential.

What’s the story with short lease property?

Technically, any property with a lease of less than 80 years has a short lease. But occasionally you will see a property for sale with leases in single figures.

The plus point of these properties is that they should be priced to take into account the cost of extending a lease. A flat which should be worth £2m, but which has a very short lease estimated to cost £1.5m to extend, will be priced at around £500,000.

This scenario has risks. Until you have negotiated, you can’t be sure how much you will end up paying for your lease, and you’re unlikely to be able to raise a mortgage on a property with a very short lease. However, it does also have potential benefits.

There will be less buyer competition for this kind of property, so you may be able to negotiate a healthy price reduction.

Occasionally, buyers who only plan to be in the British capital for a few years will buy a short lease flat as a more secure alternative to renting.

And property developers sometimes target short lease properties, in order to cut their entry costs. Not only are the properties cheaper to buy, but Stamp Duty will be lower too.

Owner occupiers may take the same view, taking advantage of low entry prices to buy a home at a better address than they could otherwise afford on the assumption that future inheritances or pay rises will one day allow them to extend it.

Should you buy a leasehold property?

Owning a leasehold property will undoubtedly come with more complications than a freehold, but it doesn’t have to be a deciding factor. If buying a leasehold property is the best way to secure a suitable house in your chosen area, then just make sure to seek professional advice and pay attention to that 80 year deadline!

Capital Gains Tax (CGT)

There are several UK property taxes that may be paid when buying or selling a domestic residence in England. These include Stamp Duty Land Tax (SDLT), Annual Tax on Enveloped Dwellings (ATED), Capital Gains Tax (CGT), Inheritance Tax (IHT), and some others (e.g. Land Transaction Tax in Wales).

While Stamp Duty is probably the most widely known, Capital Gains Tax is a significant concern for anyone who invests in property as an asset, rather than as a primary residence.

Whereas SDLT is paid by the buyer, CGT is paid by the seller. As such, if you are selling one property in order to buy another, you face the risk of being ‘double taxed’ both on the profit you make on your old property, and on the SDLT-rated value of your new purchase.

You can download a full guide to associated costs in property transactions here, or take a deeper look at Capital Gains Tax and its implications below.

Capital Gains Tax

Capital Gains Tax, written as CGT for short, is a tax paid by the seller when disposing of an asset that has increased in value since it was purchased; literally, a tax paid on the gained capital.

This is an asset tax, rather than a property tax. It is also paid on other assets, such as art, fine wine, or anything that is purchased as an investment with the intention of gaining value.

What is Capital Gains Tax?

CGT was introduced in 1965 under the Labour Chancellor of the Exchequer, James Callaghan, who went on to become Prime Minister in 1976-79. Initially inspired by rapid post-war property price increases, CGT receipts are now worth around £10 billion annually to the UK economy, according to Statista.

There are some allowances and exemptions under the modern CGT regime. In 1977, a £1,000 tax-free allowance was introduced for the first time for individuals, with a £500 allowance for capital gains made by trusts. By 2020-21 this had increased to become the Annual Exempt Allowance of £12,300 for individuals and £6,150 (still a 50% equivalent) for trusts.

Importantly, Capital Gains Tax on property usually does not apply to an individual’s primary residence. There are certain criteria to qualify for this exemption – we’ll look at those in more detail below.

You should also be aware that CGT is owed when ‘disposing of’ an asset. This includes selling for a profit, but also certain other methods of disposal, such as:

  • Swapping an asset for another asset, rather than for money.
  • Giving an asset as a gift or transferring ownership to another party.
  • Receiving compensation for an asset after it is lost or destroyed.

For property investors, whether you have a second home, a buy-to-let property or a substantial portfolio, it is important to know whether CGT will be charged on your transaction, as this can significantly impact the after-tax proceeds you receive for the sale.

Does Capital Gains Tax apply to your property?

In general, CGT will apply unless the property is your primary residence. You may qualify for Private Residence Relief if you can demonstrate that ALL of the following criteria are met:

  • You have occupied the property as your primary residence for ALL of the time you have owned it.
  • You have not let the property out or used any part of it solely for business.
  • The grounds (including buildings) are less than 5,000 square metres – slightly larger than one acre.

If you qualify for Private Residence Relief, you do not have to do anything – you receive the relief automatically. However, it is important to check whether you might be liable for some or all of the CGT payable on the transaction, if there is any doubt at all.

Our clients have access to a trusted network of financial and tax advisors, who can make certain of whether you should pay any Capital Gains Tax on your sale and explain any other UK property taxes, exemptions and allowances for which you may qualify.

When is Capital Gains Tax NOT paid on UK property?

As mentioned above, there is an exemption on Capital Gains Tax if the property was your primary residence for the entire time you owned it, has not been used for business purposes, has not been let out, and is less than 5,000 square metres in total land size.

There is also an exemption when donating property to charity, unless you sell to a charity at a profit. You can give property to your spouse without incurring any CGT, but if they sell it at a later date, they will have to pay the CGT dating back to when you first bought the property, rather than the date you transferred it to them.

Because CGT is charged based on capital gains, there should be nothing to pay if you dispose of property at a loss – worth remembering during a downturn in the UK property market.

As well as the exemptions already mentioned, it is useful to know that CGT is usually not paid on properties inherited as part of a deceased’s estate.

CGT will be paid at a later date if you dispose of the property – and may be owed immediately if you decide to sell the property and divide the proceeds between multiple beneficiaries – but is not an immediate cost incurred when inheriting a property.

However, depending on the total size of the estate, you may have to pay Inheritance Tax (IHT) on the value of the property. Black Brick can refer you to leading tax and finance advisors to determine whether you owe IHT on an inherited property during probate.

How to pay Capital Gains Tax on UK property sales

If your transaction is subject to Capital Gains Tax, you will need to know the following:

  • Calculations for each capital gain (or loss) you want to report.
  • Details of how much you paid for the asset and how much you sold it for.
  • The dates between which you owned the asset.
  • Any relevant details e.g. reliefs, allowances, exemptions and additional costs.

On property transactions completed prior to April 6th 2020, CGT had to be reported by December 31st after the end of the relevant tax year. For instance, for a sale completed on April 5th 2020, the CGT report should have been filed by December 31st 2020.

Since October 27th 2021, CGT must be reported to a Capital Gains Tax on UK Property Account via the HMRC Tax Service on GOV.UK and any CGT owed must be paid in full within 60 days of completion.

UK property Capital Gains Tax for non-residents

The process outlined above is the same for non-residents of the UK, who should also use this process to report sales of non-residential UK property or land, mixed-use property (e.g. residential and commercial mixed) and any assets that derive 75% or more of their value from UK land.

Non-residents are subject to slightly stricter reporting requirements, including the need to report sales of UK property even if you make a loss or do not exceed the relevant tax-free allowances and exemptions.

We can direct you to London’s top law and accountancy firms, who will help you meet the relevant reporting requirements when disposing of UK property assets, including PCL properties where substantial gains or losses have been incurred.

How much do you have to pay?

CGT rates depend on which Income Tax band you fall into. For Basic Rate taxpayers, the CGT rate is charged at 18% on residential property within the Basic Income Tax band, and 28% above that rate.

For Higher Rate taxpayers, gains from residential property are charged at 28%. Other assets are charged at 20%. If you have any tax-free allowance available to you, you can offset this against property at the 28% rate first, allowing you to make best use of your allowance.

Losses can be offset against gains (e.g. if you sell two properties and only one makes a profit). Significantly, any losses you do not use (in part or in full) to offset can be carried over into subsequent tax years. If in a subsequent year you sell a property at a profit, you can still offset any remaining past losses to reduce your CGT exposure.

There are different rules for non-residents on using past losses to reduce present-day CGT, on which an independent financial expert can advise.

For more up-to-date insight into property tax and its impact on PCL property transactions, please subscribe to the Black Brick market update, our regular analysis of London’s prime property market.

How can Black Brick help?

Black Brick cannot advise directly on managing tax in property investment, but we can introduce you to a specialist tax advisor who can.

Our own expert property consultants can then offer wider advice on making or managing a property investment in London.

Contact Black Brick today to discuss any high-value property transactions or PCL property sales you are planning.

Inheritance Tax (IHT)

Inheritance Tax, or IHT, is one of the four main taxes that may be paid on UK property, along with Stamp Duty Land Tax (SDLT), Annual Tax on Enveloped Dwellings (ATED), and Capital Gains Tax (CGT).

As the name indicates, IHT is paid on inherited estates. This is a significant difference from SDLT and CGT, which are both paid when a property is bought or sold. For IHT, the change in ownership is brought about by the death of the previous owner, creating a unique set of circumstances.

IHT is not only charged on the value of property held in an estate, but on the value of the entire estate, including personal possessions and finances. As such, IHT liabilities can be substantial, and it is important to plan estates carefully, ideally many years before the death of the individual.

We can refer our clients to leading tax and financial advisors for this purpose, but you can find an introductory guide to IHT below. You can also download our full guide to associated costs here.

Inheritance Tax

Tax on inherited estates in the UK dates back to the Stamps Act 1694, when probate duty was introduced to help fund the War of the League of Augsburg. The Finance Act 1894 replaced probate duty, as well as certain other duties, with a single estate duty. The current system has remained largely unchanged since the Finance Act 1986, with adjustments made to the headline rate of IHT, as well as the nil rate bands that may apply.

What is Inheritance Tax?

In general, IHT is a tax on the value of an inherited estate. This includes property, money and possessions. Even if the value of the estate falls below the nil rate threshold, it must still be reported, despite there being no IHT to pay.

What’s the current Inheritance Tax threshold?

As of 2022, IHT is payable on the portion of an estate’s value in excess of £325,000. This includes any money or possessions given away as gifts within the last seven years of the deceased’s life, as well as certain comparable circumstances, such as leasing a property below fair market value, or paying premiums on a life insurance policy for the benefit of another party.

Importantly, if the estate includes a primary residence given to children or grandchildren (including stepchildren, fostered and adopted children), this threshold usually increases to £500,000. Any unused nil rate threshold can be passed to a surviving spouse or civil partner, effectively increasing their nil rate entitlement to a maximum of £1 million.

How is Inheritance Tax calculated?

IHT is calculated at a fixed rate of 40% on the value of the estate minus the nil rate threshold. For example:

  • An estate worth £750,000 and NOT including a property will be charged 40% of the difference between £750,000 and £325,000. That’s 40% of £425,000, or £170,000.
  • An estate worth £750,000 AND including a property will be charged 40% of the difference between £750,000 and £500,000. That’s 40% of £250,000, or £100,000.

As you can see, including a property in the estate has a direct material impact on the amount of IHT owed.

There is also a reduced rate of IHT payable on estates where more than 10% of the total value of the estate is left to charity. The reduced rate is 36%. As this is a one-tenth reduction on the headline 40% rate, overall the beneficiaries do not receive more, but some of the tax normally paid to the government goes to charity instead.

IHT Reliefs and Exemptions

If you are married or in a civil partnership, the surviving partner typically does not pay any IHT on the estate. Any remaining nil rate allowance also passes to the surviving spouse, giving them a theoretical £1 million nil rate threshold upon their own death.

Other reliefs may apply on gifts given before death, but which are subject to IHT after death. This uses a tapered calculation to reduce the amount of IHT owed on the gift. Usually, gifts made more than seven years before death are subject to zero IHT.

Small gifts may also be exempt from Inheritance Tax, including:

  • Up to a total of £3,000 per year (the ‘annual exemption’).
  • Up to £250 per person per year.
  • Birthday and Christmas gifts given from regular income.
  • Weddings and civil partnership gifts of:
    • Up to £1,000 for any person in general.
    • Up to £2,500 to a grandchild or great-grandchild.
    • Up to £5,000 to a child.

Wedding gifts do not count as part of the annual exemption – so for example, an individual can give their child up to £8,000 exempt from IHT in the year that the child gets married or enters a civil partnership.

Some of these exemptions start to get complicated, especially on gifts given within less than seven years before death, which is why we advise our clients to speak with independent advisors. We can put you in touch with London’s top law and accountancy firms for this purpose.

Inheritance Tax for non-UK residents

When a person domiciled outside of the UK dies, IHT may be owed on assets owned in the UK, such as UK properties and bank accounts. Overseas pensions and foreign currency bank accounts are usually not included in this.

If the estate incurs IHT (or equivalent) in two different jurisdictions for the same asset, the executor of the will may be entitled to claim back the UK IHT under a double taxation treaty, if one exists.

Managing Inheritance Tax for high-value estates

Inheritance Tax is a crucial consideration in estate planning and it is best to structure your estate in a tax-efficient manner as early as possible, in order to take full advantage of gift allowances and tapered reliefs in the final years of your life.

For non-UK residents, the rules may be more complicated and expert advice can again help you to structure your affairs to avoid incurring unnecessary IHT on your estate, and so that your beneficiaries can claim back any double charged tax.

The four percentage point reduction in the IHT rate on estates with a 10% (or more) charitable legacy is accounted for by the legacy itself. However, if you want to make sure more of your estate goes to charity, and less to HMRC, this is worth keeping in mind when planning your estate.

Finally, it’s important to write a will. Although the intestate probate rules should ensure your estate passes to your next of kin, writing a legally enforceable will gives you much more control over who gets what – including individual items of high value.

How can a Buying Agent help?

Black Brick works on the full range of property transactions, including disposing of properties as part of estates and inheritances. In some cases, it becomes necessary to sell a property in order to pay the IHT owed on the estate.

We can recommend you to leading independent advisors, who will offer professional and sympathetic advice on this potentially upsetting subject.

To speak confidentially to one of our buying agents, please contact Black Brick today.

Stamp Duty Land Tax (SDLT)

We’ve updated our Stamp Duty guidelines, please head over to the updated 2025 guide for the latest insights.

There are several types of UK property tax that should be calculated when considering a property investment, especially in high-value properties where the tax cost will be higher.

Stamp Duty Land Tax (SDLT) is the most immediate of these, as it is paid by the buyer when purchasing a property (including first and second homes, and buy-to-let properties).

There are also UK property taxes when selling or inheriting property, including Capital Gains Tax and Inheritance Tax (IHT), and while these are paid at a later date, they should be considered from the outset.

Stamp Duty is often the largest additional expense you will incur when buying a property, so it’s vital that you understand the rules and rates. We always advise our clients to speak with an independent tax advisor when considering a purchase, for which we can put you in touch with London’s top law and accountancy firms.

You can download our full guide to associated costs when buying a property in England here, or read about SDLT in more detail below.

Stamp Duty

Stamp Duty Land Tax (often written as SDLT) is a tax charged according to the purchase price of the property. There are slightly different SDLT rates for second homes, buy-to-let properties, non-UK residents and some other specific situations.

What is Stamp Duty?

The modern system of Stamp Duty on property transactions was introduced in December 2003 and applies in England and Northern Ireland, with slightly different Land Transaction Taxes charged in Scotland and Wales.

Historically, ‘stamp duty’ was a tax charged on property transactions and official documents that needed to be rubber-stamped by the government. It no longer refers to a physical stamp, but the name has remained in use.

What’s the Stamp Duty threshold?

In England and Northern Ireland as of September 2022, the SDLT threshold starts at purchase prices over £250,000. As shown below, there are higher bands where a higher rate is payable, as well as surcharges for some kinds of buyers and transactions.

How is Stamp Duty calculated?

The amount of Stamp Duty tax UK buyers must pay depends on the value of the property. It is charged in bands, and if your purchase price goes over the threshold into a higher SDLT band, you only pay the higher rate on the portion of the purchase price above that threshold.

Stamp Duty rates change from time to time, most recently as part of the September 2022 ‘mini-budget’. As of September 2022, the UK SDLT rates are:

  • 0% up to £250,000 (£425,000 for first time buyers)
  • 5% from £250,001 – £925,000
  • 10% from £925,001 – £1.5 million
  • 12% above £1.5 million

As you can see, the Stamp Duty rate rises significantly on high-value properties, so it’s important to take the bands into account when choosing a budget for the purchase.

Can Stamp Duty be claimed back?

There are few circumstances in which you can claim back Stamp Duty. One example is if you buy a second property and complete on the sale of your primary residence within three years of the second property’s completion date.

You can then reclaim the SDLT second home surcharge that was paid on the earlier purchase (see below).

Reliefs and Exemptions

There are a number of SDLT reliefs and exemptions. One of the main Stamp Duty exemptions is for first-time buyers, but this only applies on purchases up to £625,000.

First-time residential property purchases are zero-rated up to £425,000, with a discounted 5% rate on the portion from £425,001 to £6250,000. If the purchase price is over £625,000 you must pay the full amount of Stamp Duty, making this a key negotiation threshold for FTBs.

Stamp Duty for non-UK residents

For the purposes of Stamp Duty, a non-UK resident is defined as anyone who was not present in the UK for six months (183 days) out of the preceding 12-month period.

There is a 2% surcharge on Stamp Duty for non-UK residents, in addition to any other surcharges such as the surcharge on buy-to-let properties and second homes (see below).

Stamp Duty for second homes

There is a 3% surcharge on Stamp Duty for second homes. This includes if you are selling your primary residence, but the sale does not complete until after your purchase of your new property completes. This is the case even if your old property is under contract.

As mentioned above, you can claim back the 3% if your sale completes within the following 36 months.

Stamp duty for non-residential and mixed property

SDLT rates are different for non-residential and mixed property, starting from 2% on transactions of £150,001 or more. This includes commercial space such as shops or offices, and also applies when 6 or more residential properties are bought in one transaction.

How does Stamp Duty affect the prime property market?

Changes to the Stamp Duty tariff can have significant effects on valuations and activity in the prime property market, as even a small increase in the higher bands can add thousands to a high-value transaction.

In the past, the UK government has increased the higher band rates to compensate for Stamp Duty ‘holidays’ for low-value properties and first-time buyers – so prime buyers can end up footing the bill for those at the bottom of the property ladder.

For insights into the current state of the London property market, read our latest Market Update, which provides regular information about PCL market conditions, changes to property taxes and their impact on high-value transactions.

Stamp Duty in high-value transactions

The current Stamp Duty rate rises to 10% at £925,000 and 12% over £1.5 million – and that’s on UK-resident primary property purchases with none of the above surcharges added.

If you are planning a high-value property purchase, especially as a second home, buy-to-let property and/or as a non-UK resident buyer, it’s important to get professional advice on your exposure to SDLT.

At Black Brick, we can put you in contact with leading independent tax advisors who can advise on the implications of Stamp Duty on your purchase.

Considering a property purchase?

Black Brick is London’s leading buying agent, working on your behalf to ensure a smooth and successful transaction from start to finish. We can refer you to experts in the world of finance and tax, and even negotiate the best price for your purchase to ensure it is a good investment after Stamp Duty has been applied.

To find out more, contact Black Brick today.