US UK Tax Returns Preparation: Lease Extensions for Americans

An American who extends the lease on a London flat, or joins a collective enfranchisement, has incurred capital expenditure that belongs in two computations. HMRC generally adds the premium to allowable cost on sale; the IRS adds it to dollar basis at the spot rate on payment. Neither return shows it until disposal, which is why it is often lost.

This guide is written from the leaseholder's side only. It sets out, item by item, how US UK tax returns preparation should record a lease extension premium, the professional and landlord's costs that come with it, SDLT, a sterling loan taken to fund it, and a share in a freehold-owning company. At Jungle Tax we see the same pattern repeatedly: the transaction was handled impeccably by the conveyancer, and then never reached either tax file.

What actually happens, legally, when a lease is extended?

The tax treatment follows the legal mechanics, so they are worth stating precisely.

• Statutory lease extension. A qualifying leaseholder of a flat in England and Wales can require the landlord to grant a new lease, currently for the unexpired term plus 90 years at a peppercorn ground rent, in return for a premium. Legally the old lease is surrendered and a new one granted in its place.
• Informal (negotiated) extension. The parties agree terms outside the statutory route. The term, ground rent and premium are whatever is negotiated, and the documentation may be a deed of surrender and regrant or a deed of variation that takes effect in the same way.
• Collective enfranchisement. A sufficient number of qualifying leaseholders in the building together buy the freehold, normally through a nominee purchaser company in which each participating flat owner takes a share or membership. Participants commonly then have longer leases granted to themselves.

In each case the leaseholder pays a premium (or a contribution to the freehold price), their own solicitor's and valuer's fees, and, under the rules as they currently stand for statutory claims, the landlord's reasonable legal and valuation costs as well.

How does HMRC treat the premium paid by the leaseholder?

Is the extension itself a disposal?

Strictly, yes: surrendering the old lease is a disposal, with the value of the new lease as consideration. In practice HMRC's Extra-Statutory Concession D39 allows the leaseholder to treat the surrender and regrant as not being a disposal where the conditions are satisfied. As set out in the HMRC Capital Gains Manual at CG71240, those conditions are that the transaction is on arm's length terms, is not part of a larger scheme, the tenant receives no capital sum, the property is the same, and the terms of the new lease differ only in duration and rent. A straightforward statutory extension will ordinarily meet them. Where the concession applies, the extended lease is treated as acquired when the original lease was acquired.

Is the premium allowable on a later sale?

HMRC generally accepts that the premium is allowable expenditure in the computation of the gain on an eventual sale. Where the concession applies and the extended lease is treated as the same asset, the premium is normally analysed as enhancement expenditure: money spent on the asset for the purpose of enhancing its value and reflected in its state or nature at disposal, the tests described at CG15180. A flat sold with a 150-year lease rather than a 60-year lease plainly reflects that expenditure.

Two consequences follow for the return preparer:

• The premium is capital. It is not deductible against rental income on the UK property pages if the flat is let, however large it is relative to the rent.
• It produces no entry on any UK return in the year it is paid. It sits dormant until the disposal computation, which may be twenty years later. The evidence, usually the solicitor's completion statement, has to survive that long.

Professional fees and the landlord's costs

The leaseholder's own legal and valuation fees incurred in obtaining the extension are generally treated as part of the capital cost, as is any SDLT paid on the premium. The landlord's legal and valuation costs that the leaseholder is obliged to bear are, in substance, part of what the leaseholder has to pay to obtain the longer lease, and are generally treated in the same way. Three categories need more care:

• Costs of financing. Mortgage arrangement fees, lender's valuation fees and loan interest are not part of the capital gains cost.
• Tribunal or dispute costs. Costs of a contested determination of the premium should be reviewed on their facts rather than assumed to be allowable.
• Abortive costs. Fees on a claim that was withdrawn and never completed are not reflected in the asset at disposal and are unlikely to qualify.

The wasting-asset rules for leases of 50 years or less

A lease with 50 years or less to run is a wasting asset for capital gains purposes. On disposal of such a lease, allowable expenditure is not deducted in full; it is written down using a statutory curved-line table, so the deductible cost falls slowly at first and faster as expiry approaches. HMRC's guidance on leases starts at CG70700P.

For most London flat owners the point is historical rather than live: a statutory extension adds 90 years, so the lease disposed of will usually be well above 50 years. It matters in two situations. First, where a lease had already fallen to 50 years or less before it was extended, the interaction between the wasting rules and the extension is technically intricate and should be worked through in the computation rather than assumed away. Second, where a short informal extension leaves the lease at or under 50 years on sale, both the original cost and the premium are subject to restriction.

Private residence relief where the flat is the main home

If the flat has been the owner's only or main residence throughout the period of ownership, private residence relief will generally cover the whole gain and the premium never comes into a UK computation at all. Where occupation was partial, for example the flat was let before or after a period of residence, relief is apportioned by time and the premium is simply part of the total allowable cost of the single asset. It is not matched to the period in which it was paid.

This is the point at which American owners most often stop keeping records, on the reasoning that the gain is exempt. As explained below, it is exempt in one country only up to a limit.

SDLT on the premium, in general terms

The premium for a new lease is chargeable consideration for stamp duty land tax. In general terms:

• SDLT is calculated on the premium under the residential rates. Where the premium is below the nil-rate threshold in force at completion, no SDLT is due at the standard rates. The current bands are published on GOV.UK.
• A statutory extension carries a peppercorn rent, so there is ordinarily no rental element to compute.
• The higher rates for additional dwellings can apply to a lease extension premium where the leaseholder owns another dwelling, subject to the conditions and exceptions in the legislation, including a specific rule for a purchaser increasing their interest in a long-standing main residence. A flat held as an investment by someone who owns their home elsewhere is the typical case where the surcharge needs to be checked.
• A surcharge also applies to purchasers who are not UK resident under the SDLT residence test, which is a day-count test distinct from income tax residence.
• A land transaction return is required once the premium reaches the notification threshold, even where the calculation produces little or no tax.

For collective enfranchisement there is a specific relief, described in HMRC's SDLT Manual, under which the rate of tax is found by dividing the freehold price by the number of flats whose tenants are participating in the statutory claim, and then applying that rate to the whole price. In many buildings this brings the charge to nil. The relief is claimed by the nominee purchaser in its return.

For the return preparer the practical point is narrower: whatever SDLT the leaseholder actually bore is part of the capital cost on both the UK and US sides and should be captured from the completion statement.

Buying a share of the freehold through a nominee company

On a collective enfranchisement the participating leaseholders rarely hold the freehold in their own names. A company acquires it, and each participant holds a share or, in a company limited by guarantee, a membership. From the individual's UK capital gains perspective:

• The contribution to the freehold price and associated costs is generally the cost of the share or interest in the company.
• If the participant is then granted a new long lease of their own flat, the analysis of that step, and how cost is attributed between the share and the lease, has been the subject of professional debate, including how HMRC views the grant of very long leases for no premium. The position should be documented when it happens.
• On sale of the flat the share is normally transferred to the buyer with the lease. The sale agreement rarely apportions the price, but the computation has to deal with two assets.

Where the freehold is instead held directly by up to four leaseholders as legal owners for themselves and the others, there is no company, and the reporting analysis on the US side changes accordingly.

What is in force under the Leasehold and Freehold Reform Act 2024?

The Act received Royal Assent in May 2024, but most of it takes effect only when commenced by regulations. As far as we have been able to verify at the date of this guide:

• In force: the requirement to have owned the flat for two years before bringing a lease extension or enfranchisement claim was removed from 31 January 2025. Certain right to manage changes followed in March 2025.
• Not yet in force: the new valuation method, including the removal of marriage value for leases under 80 years, and the 990-year standard extension term. Premiums on claims completing now are still calculated under the earlier rules.

The remaining provisions depend on secondary legislation and consultation, and further reform has been published in draft. None of this alters the tax analysis above: whatever the premium turns out to be, and whenever it is paid, it is recorded in the same way. It does mean that a transaction completed in 2025 or 2026 should be documented under the rules actually in force on that date, not those expected.

How does the IRS treat the same premium?

Dollar basis at the spot rate on payment

The IRS has no concept of a UK lease extension, but the general basis rules apply without difficulty. Amounts paid to acquire or improve a capital asset, or to extend the taxpayer's interest in it, are capitalised. IRS Publication 551 describes the general approach to basis and adjustments to it.

The cross-border point is currency. A US taxpayer's functional currency is the dollar, so basis in a UK flat is not a sterling figure converted once at sale. It is the sum of each capital payment translated at the spot rate on the date it was made: the original purchase at the rate in the year of purchase, the premium at the rate on completion of the extension, each professional fee and the SDLT at the rate when paid. Sale proceeds are translated at the rate on the sale date. The dollar gain therefore differs from the sterling gain, sometimes materially, and occasionally in direction.

Personal residence: no deduction, basis only

Where the flat is the taxpayer's home or is otherwise held for personal use, the premium and related costs give no current deduction. They increase adjusted basis. On sale, the home sale exclusion may be available where the ownership and use tests are met, but it is limited to $250,000 of gain, or $500,000 on a qualifying joint return. A long-held London flat can exceed that in dollar terms even where the UK gain is wholly covered by private residence relief, and there may then be no UK tax to credit against the US liability on the excess. Every dollar of provable basis, including the premium, reduces that exposure.

Rental flat: amortisation, section 178 and depreciation

Where the flat is let, the cost of the extension is recovered over time rather than on sale alone. There is no IRS guidance directed at UK residential lease extensions, and preparers encounter two approaches:

• Lease acquisition cost. The premium is treated as a cost of acquiring a leasehold interest and amortised rateably over the lease term. Section 178 governs how the term is measured, bringing in renewal periods where less than 75 percent of the cost is attributable to the term remaining at acquisition. On a 90-year extension the annual deduction is very small.
• Tantamount to ownership. Where a very long lease has been treated from the outset as equivalent to ownership of the building, with the building element depreciated as foreign residential rental property under the alternative depreciation system (generally 30 years for property placed in service after 2017 and 40 years before), some preparers treat the premium consistently with that characterisation.

These produce different annual deductions and different adjusted basis on sale. What matters for compliance is that the position is reasoned, documented in the file, applied consistently year to year, and consistent with how the original purchase price has been treated. A return that depreciates the original cost as a building while ignoring the premium altogether is the most common error we see. Whichever method is used, depreciation and amortisation that were allowable reduce basis whether or not they were actually claimed.

A sterling-financed premium and section 988

If the premium is funded by additional sterling borrowing, a second, separate US issue arises. A sterling loan is a foreign currency liability. Its dollar value is fixed at the spot rate on drawdown, and each repayment of principal is compared with that figure. If sterling is weaker when the loan is repaid, the taxpayer has discharged the debt with fewer dollars than were borrowed and generally recognises ordinary currency gain under section 988, entirely independently of whether the flat itself has risen or fallen in value. Where the borrowing is personal rather than for a rental activity, a currency loss on repayment is generally not deductible. A further advance to fund the premium is tracked as its own tranche with its own drawdown rate; it is not blended into the original mortgage.

Share of freehold company: a possible foreign corporation holding

A UK private company holding the freehold is generally classified as a foreign corporation for US purposes. Three reporting questions follow, mentioned here only briefly:

• Form 5471. A US person who acquires ten percent or more of a foreign corporation, or who is an officer or director when a US person does so, can come within a filing category. In a building of ten flats or fewer, one flat's share is frequently ten percent or more. Penalties for non-filing are fixed-amount and apply per form, per year.
• Form 8938. Shares in a foreign corporation held directly, rather than in a financial account, are a specified foreign financial asset. The value is often nominal, but the asset counts where the filing threshold is otherwise met.
• FBAR. A leaseholder who becomes a director with signature authority over the company's service charge or reserve account may have a foreign account reporting obligation in respect of that account, even with no personal financial interest. Our FBAR penalty calculator illustrates the exposure for missed years.

A company limited by guarantee, with members rather than shareholders, requires its own classification analysis. So does the passive character of a company whose only income is ground rent.

Item by item: UK versus US treatment

A worked illustration of why the dollar figure differs

The figures below are illustrative only, including the exchange rates, and ignore purchase and sale costs for simplicity.

• Flat bought for £600,000 when the rate was 1.60: dollar basis $960,000.
• Lease extension premium of £80,000 paid when the rate was 1.27: $101,600.
• Own fees, landlord's costs and SDLT totalling £9,000 at the same rate: $11,430.
• Flat sold for £900,000 when the rate is 1.30: proceeds $1,170,000.

The sterling gain is £211,000. The dollar gain is $96,970. If the premium and costs had been left out, the US return would show a gain of $210,000, more than double. The UK computation, had the extension been forgotten there, would show £300,000. Neither authority will add the cost back on the taxpayer's behalf.

Reporting the eventual sale on both returns

UK. A UK resident reports a taxable gain on residential property and pays the tax within 60 days of completion, then reports again on the Self Assessment return. A non-UK resident must file the property disposal return within 60 days whether or not tax is due, and the computation may use a rebased cost where the flat was held before April 2015, in which case only expenditure after that date is added to the rebased value.

US. The sale goes on Form 8949 and Schedule D unless the whole gain is excluded under the home sale rules. Where UK tax has been paid on the same gain, a foreign tax credit is computed on Form 1116. Timing differs: the UK tax year and the US calendar year do not align, and the credit has to be matched to the correct US year. For a rental flat, gain attributable to prior depreciation is subject to its own US rate treatment. The net investment income tax may also apply to gain that is not excluded.

Catch-up: the premium was never added to basis on either return

The remedy depends on what has already been filed.

1. Flat not yet sold, held for personal use. Nothing has been misreported. The task is to rebuild the file: completion statement, premium, each fee, SDLT, payment dates and spot rates, and loan drawdown records. This is far easier now than at the point of sale.
2. Flat not yet sold, let out. On the UK side nothing is wrong unless the premium was deducted against rent, which would need correcting. On the US side, cost recovery that should have been claimed has been missed. Because allowable amounts reduce basis regardless, this is generally corrected through a change in accounting method on Form 3115, bringing the missed amount into the current year, rather than by amending each prior return.
3. Sale already reported, gain overstated. A UK Self Assessment return can be amended within twelve months of the filing deadline; after that, a claim for overpayment relief may be available within four years of the end of the tax year. A US return can generally be amended within three years of filing. Each claim needs the documentary evidence of payment.
4. Share of freehold company never reported. Missed Forms 5471 and 8938 and any FBARs are information return failures and are addressed through the IRS's delinquent filing routes.
5. US returns not filed at all. Where the flat owner has not been filing US returns, for example an American who has lived in London for decades, the lease extension is one component of a wider catch-up. Non-wilful taxpayers generally use the IRS streamlined filing procedures, and the basis reconstruction is done as part of that submission.

The records a preparer will ask for

• The solicitor's completion statement for the extension or enfranchisement, showing premium, both sides' costs and SDLT.
• The valuation report and the section 42 or section 13 notice and counter-notice, which evidence arm's length terms.
• The new lease and the Land Registry title entries before and after.
• Bank statements showing each payment date, so the correct spot rate can be applied.
• Any loan offer and drawdown statement for borrowing used to fund the premium.
• For enfranchisement: the company's articles, the register of members, the share certificate or membership confirmation, the list of directors and the company bank mandate.
• The original purchase completion statement, without which the premium has nothing to be added to.

How we handle this in practice

We prepare both returns together, so the sterling computation for HMRC and the dollar computation for the IRS are built from the same documents and reconcile to each other. Our US-UK tax accountants work alongside our UK tax return and US tax return teams, and our role is preparation and compliance: establishing what was paid, when, at what rate, and where it belongs on each form.

If you have extended a lease or taken a share of freehold and are not certain it has been captured on both sides, or you are approaching a sale and need the basis file rebuilt first, contact our cross-border team for a confidential consultation. We will review the transaction documents, identify what each return should have shown, and bring both files up to date.