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HMRC internal manual

Capital Gains Manual

Private residence relief: realising gain: superior interest

The holder of a leasehold interest in a dwelling house may have the opportunity to acquire the superior interest, or the freehold, and may have a statutory right to acquire the freehold. Often this right can be exercised at a statutorily determined price which is below the price which would be paid by a third party.

The combined value of the freehold and leasehold, or of the superior and inferior interests, may be greater than the values of either in isolation. The increased value on combination is called the marriage value.

Financially it will often benefit a leaseholder to acquire the freehold, or the superior leasehold, of their dwelling house, before sale so as to realise that marriage value.

In these circumstances the expenditure on acquiring the freehold or superior leasehold is expenditure incurred for the purpose of realising a gain on the disposal of the dwelling house. The part of the gain attributable to the expenditure is, in effect, the marriage value of the two interests. This is the part of the gain excluded from private residence relief by TCGA92/S224 (3).

This is illustrated by the example at CG65257.

Under statutory provisions within the Leasehold Reform, Housing and Urban Development Act 1993 leaseholders of flats may be jointly entitled to acquire the freehold of the building in which their flats are situated. This will usually be carried out on their behalf by a vehicle, such as a company, which they collectively own. Alternatively, they may be entitled to the grant of a new lease.

The operation of these statutory provisions may allow a small number of leaseholders the opportunity to make speculative gains. If so you should consider whether Section 224(3) can be applied to restrict relief.