I personal a flat with a 39 12 months lease that I wish to lengthen: Why is it so costly?

I am the owner of a leasehold flat with 39 years remaining on the lease, and I would like to extend it. 

Since looking into this, I’ve been shocked at how much it could cost – £250,000, according to one estimate. 

It sounds as if the cost of the lease extension will end up being the difference between the value of the property with a 39 year lease, and the value of the property with a full lease, which seems unfair. 

I’m also concerned about stamp duty. The valuer I spoke to suggested that because I own another property, which I rent out, I will be liable for the stamp duty surcharge of 5 per cent that is paid by second home owners.

But the property I am extending the lease on is my main residence, so I didn’t think the surcharge applied. Can you help?

Ed Magnus of This is Money replies: Extending a lease can be an expensive business, and you are wise to be questioning all of these charges. 

At present, you’ll be liable to pay something known as marriage value. 

I say ‘at present’ because this element of the lease extension calculation could be abolished in the future, under the the Leasehold and Freehold Reform Act.

Marriage value becomes payable on homes with leases below 80 years, and is based on the increase that will occur as a result of a lease extension.

Put another way, it’s the financial benefit that results from merging part of the freeholder and leaseholder interests, hence the term ‘marriage’.

The marriage value must be split 50:50 with the freeholder. In practice, this means the leaseholder pays 50 per cent of the marriage value to the freeholder, as part of the premium payable for the lease extension.

On top of marriage value, you also need to budget for buying out the remaining ground rent on the lease, and for your own legal and valuation fees, and those of the freeholder – which under current law, you must also pay.

If marriage value is to be abolished or reformed, there may be some merit in waiting a few years before trying to extend the lease.

This is a risk, though, given your lease will only become shorter and more expensive to extend if the current Government fails to follow through on the Leasehold and Freehold Reform Act 2024.

Details of the Leasehold and Commonhold Reform Bill were expected to be made public before the end of this year, but this has been delayed.  

For you, there is also the question of stamp duty. Many people who are considering extending their lease would probably not assume there would be stamp duty to pay. But is that the case?

For expert advice, we spoke to Jessica Garbutt, consulting accountant at Property Tax Advice & RiverView Portfolio.

Jessica Garbutt replies: Leasehold extensions are a particularly complex area of stamp duty taxation, but let’s break it down.

When I’m looking at a stamp duty question, I like to think of it in two parts.

First, the basis of the calculation – the value on which stamp duty will be charged. Second, the rates that apply – how that value is taxed.

For a leasehold extension, the basis is made up of two separate elements. The lease premium is the amount you pay to extend or renew the lease, and the net present value (NPV) is the total ground rent payable over the term of the lease. 

These two elements are treated differently for SDLT purposes, so they must be considered separately.

The lease premium is taxed under the residential rates of SDLT, the same as if you were purchasing a freehold property. 

You are also correct in thinking that you are liable for the second home rate of stamp duty, rather than the main residence rate.  

Unlike a freehold purchase or your original leasehold purchase, a lease extension is treated as a separate chargeable interest in land, so doesn’t qualify as a replacement of your main residence.

When you bought your flat in 2019, that purchase was considered a replacement of your previous main home, so only the standard SDLT rates applied – even though you owned another property at the time. 

Unfortunately, a lease extension does not qualify as a replacement of your main home, so it is likely that the 5 per cent additional property surcharge will apply because you already own another property.

Therefore, in your case, stamp duty would be payable on the £250,000 lease premium at 5 per cent up to £125,000, and 7 per cent between £125,001 and £250,000. 

It means it will likely cost you £15,000 in stamp duty to extend the lease.

The ground rent NPV element is taxed under different rates. For residential leases, SDLT is charged 0 per cent on the first £125,000 of the NPV of the rent and 1 per cent on any amount above that threshold. 

With that being said, for residential properties, it is unlikely that SDLT will be payable as the NPV of the ground rent will most likely be within the 0 per cent band.

However, because of the complexity of leasehold SDLT, and the need to consider both elements and any additional property surcharges, it’s important to seek advice from a specialist if you want to estimate the SDLT payable accurately.