Published: July 2026 | Fact-Checked & Audited By: David Vance, CTA FCA (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 UK tax year. All lease extension calculations and valuation rules have been audited against official Leasehold Reform guidelines.
Calculating the cost (premium) of a lease extension in the UK involves a highly technical mathematical formula. This valuation formula determines the compensation owed to the freeholder for extending your lease and reducing your ground rent to £0. In this guide, we break down the three primary components of leasehold valuation math: ground rent capitalization, reversionary interest deferment, and the transition rules surrounding marriage value.
The Three Components of Lease Extension Premium
Under the statutory framework, the total premium paid to the freeholder is the sum of three parts:
- The Capitalisation of Ground Rent: Compensating the freeholder for the loss of the annual ground rent they would have received over the remaining lease term.
- The Deferment of Reversion: Compensating the freeholder because they have to wait an extra 990 years to regain possession of the property.
- Marriage Value (Transition Rules): If the lease has under 80 years remaining, the freeholder is entitled to 50% of the “marriage value” (the increase in property value created by the extension). Under the Leasehold Reform Act 2024, this component is abolished from the new statutory formula.
Component 1: Capitalisation of Ground Rent Math
The capitalization value represents the present value of the stream of ground rent payments. It is calculated by discounting the ground rent using a capitalization rate (typically between 5% and 7% depending on the risk profile and rent review terms):
$$Capitalisation = sum_{i=1}^{t} frac{GR_i}{(1 + c)^i}$$
Where GR_i is the ground rent in Year i, c is the capitalization rate, and t is the remaining lease term in years.
Component 2: Deferment of Reversion Math
The reversionary value is the present value of the freehold property at the end of the existing lease. Since the freeholder has to wait an extra 990 years, the present value of the reversion is discounted back to today using the statutory Sportelli rate (mandated at 5.0% for houses and 4.75% for flats):
$$Reversion = frac{V_F}{(1 + d)^t}$$
Where V_F is the current freehold value of the property, d is the deferment rate (4.75% or 5.0%), and t is the remaining lease term.
Step-by-Step Worked Example (Flat under 80 Years)
Let’s calculate the statutory premium for a flat in England with a freehold value of £250,000, a remaining lease term of 75 years, and a constant ground rent of £100 per year (using a c-rate of 6% and d-rate of 4.75%):
- Calculate Ground Rent Capitalisation:
- Discounted ground rent over 75 years = £100 * [1 – (1.06)^-75] / 0.06 = £1,647.00
- Calculate Deferment of Reversion:
- Reversionary Value = £250,000 / (1.0475)^75 = £7,869.00
- Subtotal (Without Marriage Value): £1,647.00 + £7,869.00 = £9,516.00 (This is the premium under the new Leasehold Reform Act 2024).
- Calculate Marriage Value (Old Rules – For Comparison):
- Assume extending the lease increases the property’s value from £240,000 (leasehold) to £250,000 (extended leasehold).
- Marriage Value = Extended Value (£250k) – [Leasehold Value (£240k) + Freehold Value (£9.5k)] = £250,000 – £249,516 = £484.00.
- Freeholder’s Share (50%) = £242.00.
- Total Premium under Old Rules: £9,516.00 + £242.00 = £9,758.00.
David Vance, CTA FCA, recommends: “When calculating a lease extension, the freehold value of the property is the single most critical variable. An increase of just £10,000 in your property’s valuation can add several hundred pounds to the reversionary interest. Always hire an RICS-qualified surveyor who specializes in leasehold enfranchisement to ensure your valuation is defensible against the freeholder’s counter-notice.”
Topical Cluster Links
To run lease extension calculations or check active legislation, refer to our other guides:
- Use our Lease Extension Cost Calculator to estimate your premium.
- Read our guide on the Leasehold Reform Act: New Rules & Changes.
- Read our guide on Statutory vs Informal Lease Extensions: Section 42 Notices.
Frequently Asked Questions (FAQs)
1. What is the Sportelli rate for lease extension?
The Sportelli rate is the statutory deferment rate set by the Lands Tribunal. It is set at 4.75% for residential flats and 5.0% for houses.
2. How does capitalization rate affect lease extension cost?
A lower capitalization rate (e.g. 5%) increases the capitalization value of the ground rent, making the extension more expensive. A higher rate (e.g. 7%) decreases the capitalization value, lowering the cost.
3. What is marriage value in a lease extension?
Marriage value represents the additional synergy value created by combining the leasehold and freehold interests. It is shared 50/50 with the freeholder if the remaining lease is under 80 years, but is set to be abolished under the new 2024 Act.