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What do the leasehold changes mean for your property and your pension? The government has announced a cap on leasehold ground rents in at £250 a year, with a transition to a peppercorn rent (effectively zero) after 40 years.
This reform could save millions of leaseholders thousands of pounds, but it has sparked concern among pension funds heavily invested in freeholds.
Whether you own leasehold property, or have part of your pension invested in the housing market, here’s what you need to know.
What’s on this page?
Leasehold means you own your home but not the land it sits on. The land is owned by a freeholder (an individual or company), with a lease granting leaseholders the right to live there for a set period, usually between 99 and 999 years.
Most flats in England and Wales, and some houses, are sold this way. (Leasehold properties are much rarer in Scotland, and Northern Ireland has a different system.)
The leasehold system has long been criticised for giving owners little control and exposing them to high costs. Freeholders are often accused of inflating service charges (the fees paid by leaseholders for maintenance of the communal parts of blocks of flats) to boost profits.
Mark Harris, chief executive of mortgage broker SPF Private Clients, explains: “Ground rent is a fee paid by the leaseholder to the freeholder of a property every year. It can range from peppercorn (no financial value) to more than £1,000 a year. Ground rents have been abolished for new leases granted after 1 July 2022 so this impacts existing leases created before then.”
“Ground rent is a fee paid by the leaseholder to the freeholder of a property every year. It can range from peppercorn (no financial value) to more than £1,000 a year. Ground rents have been abolished for new leases granted after 1 July 2022 so this impacts existing leases created before then.”
Ground rent has become a source of controversy over the past few years as many leases – especially on new build homes – have included clauses allowing ground rents to rise sharply. This has left thousands of homeowners with escalating costs and properties that are difficult to sell or remortgage. Mortgage lenders are generally not keen to lend on properties with ground rents more than 0.1% of the property value (for example, £250 for a property worth £250,000).
The Leasehold Reform (Ground Rent) Act 2022 ended ground rent for most new leases starting after 30 June 2022. For new retirement properties, ground rent was banned from 1 April 2023.
The changes announced at the end of January 2026 focus on tackling high ground rents in older leases (including older retirement properties). Under the draft Leasehold and Commonhold Reform Bill, ground rents will be capped at £250 per year, reducing to close to zero after 40 years. The changes are expected to come into effect in late 2028.
Ministers estimate that about 3.8 million leasehold properties will benefit, with ground rent savings totalling £12.7 billion over the lifetime of leases. It’s good news for owners of these properties – including if you are planning to pass one on to your children, who might otherwise have been saddled with escalating costs.
Separately from ground rent, the Leasehold and Freehold Reform Act 2024, which is currently being implemented, removed the concept of ‘marriage value’. That means extensions, which can currently be expensive for people with shorter leases (below 80 years), should become significantly cheaper.
The 2024 act is also supposed to bring in increased transparency over service charges, so that leaseholders can better hold their landlords to account.
The latest ground rent developments are good news for leaseholders. If you own a leasehold flat, check your lease to find out what ground rent you currently pay and how it increases. The cap may help your future finances. You should also keep an eye on how the Leasehold and Commonhold Reform Bill makes its way through parliament, and any amendments that are made.
“This change should benefit many leaseholders and make their properties more attractive to lenders,” says Harris, “However, lower ground rents could be pushed to the limit which may in turn make some applications unacceptable to lenders particularly on lower-value properties with ground rent percentage caps."
Leaseholders usually choose to extend their lease because, as the term runs down, the property’s value declines. This can make a property difficult to remortgage or sell. In theory, if the lease reduces to zero, the property is returned to ownership of the freeholder; in reality, most leases are extended well before this happens.
Extending a lease can be expensive and time-consuming. Lease extension prices depend on the amount of ground rent and the term of the lease. The cap of £250 a year on ground rents is significant, as it is likely to make it cheaper to extend your lease.
However, Paula Higgins, founder of the HomeOwners Alliance, says leaseholders shouldn’t assume it’s worth waiting to start the lease extension process.
She says: “The proposal is currently only part of a draft bill and there are still many hurdles before it becomes law. First, the bill must complete parliamentary scrutiny and be formally introduced. There will then need to be a further consultation on how lease extension valuations should work, which is a complex and often contentious area.
“On top of that, parts of the leasehold reform legislation passed in 2024 still require fixes through further primary legislation before the new system can operate properly.
“For leaseholders with short leases, high ground rents, or plans to sell or remortgage, delaying could actually cost more if the lease continues to shorten in the meantime. That’s why our advice is not to sit tight based on announcements alone.
“Instead, leaseholders should speak to a specialist leasehold solicitor who can assess their individual circumstances and explain whether extending now, or waiting, is the better option for them.”
Pension funds have traditionally invested in ground rents and freeholds because they provide steady, long-term income. Analysts say the government’s reforms are likely to reduce the value of these investments, forcing some funds to take losses.
Dan Coatsworth, head of markets at AJ Bell, says: “M&G is exposed to £722 million of ground rent assets and says the changes could reduce its solvency II ratio by one percentage point. Assuming the proposals go ahead, M&G will have to write down the value of some of its assets and suffer a hit to profits.”
On the other hand, the National Leasehold Campaign (NLC) suggests that “pension fund investors lobbying is nothing more than a last-ditch attempt to derail the leasehold reform agenda.”
If you’re a pension saver with a workplace or personal pension, it’s unlikely you need to panic. For most diversified portfolios, the impact is likely to be very small. The ‘hit’ will largely be felt by institutional investors in ‘alternative income’ funds.
If you’re worried about exposure to property-related income streams, ask your pension scheme what proportion of its assets are tied up in ground rents or related property investments.
Whatever you do, don’t rush to sell your pension investments solely based on the news about ground rents – broad diversification protects most portfolios.
Looking ahead, other government proposals include banning new leasehold flats (they will be commonhold instead). Commonhold is a new type of arrangement created under the 2002 Act. A company known as a ‘commonhold association’ is created to own the freehold of the building and to maintaining the shared parts of the building. The owner of each flat within the building owns a share of the building, is a member of the association and must agree to certain terms and conditions.
Another proposed change is giving existing leaseholders the right to convert to commonhold. Importantly, there is a plan to end ‘forfeiture’, which allows freeholders to repossess homes over even debts as small as £350.
But nothing is final until the Leasehold and Commonhold Reform bill becomes law. We’ll keep you updated on future developments.
Provided by Tembo
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