Capital Gains on garden development

[Mark-Thornton]

We have a house with a 1/2 acre garden - I have planning permission to build 3 houses in the garden - renovating the existing house to create 4 houses to sell.
What is the status of the 4 houses for CGT?
We have lived in the house for 11 years
What costs can be used to mitigate any CGT - eg improvements to the original dwelling over the 11 years?

[mullet]

If this has been your only or main residence throughout the period of ownership, and you sell it as a job lot with planning permission to a developer, then the disposal would be free of CGT. But if you effectively develop and sell the new properties then forget CGT ... this could be chargeable as self employed income as it sounds like an adventure in the nature of trade. Which would leave only the original house and its smaller garden attracting private residence relief under the CGT rules. On that basis any improvement costs to the main house would be irrelevant since the overall gain would be exempt.

[Incredulum]

If this is a trading transaction as Mullet suggests I'd probably be inclined to sell the garden (WITH planning) to a company that I own. You'd then get a tax-free uplift on the value of the land with planning. And getting the profits on the development to arise in the company would save NI (cash paid out as dividends).

That said, it's by no means absolutely clear that this is a trading transaction. There's loads of guidance from HMRC on the "badges of trade". Start here. http://www.hmrc.gov.uk/manuals/bimmanual/bim20205.htm and consider each point.

1. Profit seeking motive - supports trading but by no means conclusive, so I don't think helps either side.
2. The number of transactions. Arguably there is only one transaction. Arguably also there are four.
3. Nature of the asset - property. That is typically either traded or investment, so I don't think helps either side.
4. Existence of other similar transactions. If you were to move on and buy another plot and build on it again, then it would definitely push this one into trading. (Or if you've done it before, or if you're a builder by trade.) If that's not you, then supports not trading.
5. Changes to the asset - supports trading.
6. Way sale carried out - supports trading.
7. Source of finance - I'm guessing you will have a bank loan, thus supporting trading.
8. Interval of time - a long time; supports not trading.
9. Method of acquisition - this was your home for many years; supports not trading.

So
Trading: 3
Not trading: 3
No help: 3 (although points 2 and 3 might just suggest more of a trading feel rather than less; or not.)

So it may in fact give you a capital gain, not a trading profit - in which case you wouldn't want a company.

Which would leave only the original house and its smaller garden attracting private residence relief under the CGT rules. On that basis any improvement costs to the main house would be irrelevant since the overall gain would be exempt.

I am not sure I agree with this; there is no CGT-free gain on the profit arising from refurbishment - s224(3) TCGA refers.

[section 44]

But even if there isn't a trade wouldn't the anti-avoidance transactions in land provisions be in point if he were to develop the land for profit?

[Incredulum]

If you mean a s755 ITA07 charge have you considered s767 (b) ITA07?

[section 44]

good point

[Mark-Thornton]

So is this the best plan:
1) Establish company - ABC Ltd VAT registered - 100% owned by me
2) Sell undeveloped property with benefit of planning decision to ABC Ltd for fair value £1.5m to be paid at later date - No tax payable
3) ABC Ltd borrows £1.2m to develop the site
4) ABC Ltd builds properties and reclaims VAT on new build VAT inputs
5) ABC Ltd sells 4 properties for £3.0m
6) ABC Ltd repays £1.2m bank loan and pays £1.5m for land
7) ABC Ltd pays tax on 0.3m profit - at what rate?
8) ABC Ltd distributes balance as dividend
9) ABC Ltd dissolved

[Incredulum]

2) (a) SDLT payable at 5% = £75,000. (b) don't sell the main house - that's only subject to CGT at 28% on the profit between market value at this point and the sale date.
7) Assuming you & your wife/civil partner own no other companies then 20%.
8) Dividend taxable at the 50% rate i.e. 36.11% of the dividend.

There may be scope for obtaining capital gains treatment on winding up (i.e. 28% tax rate, not 36.11%) - but you may well be into anti-avoidance rules section 44 mentioned above; I haven't checked.

A commercial point. A profit of 0.3m on 3m of costs is tiny and barely seems worth it.

[pqtaxation]

.....
2) (a) SDLT payable at 5% = £75,000. (b) don't sell the main house - that's only subject to CGT at 28% on the profit between market value at this point and the sale date.


A commercial point. A profit of 0.3m on 3m of costs is tiny and barely seems worth it.

Two questions please:

Is not the commercial profit (corporation taxable at 20%) of £0.3m mainly dependent on the purchase value of land which engenders the (CG tax-free) gain to be made on the land?

Will the gain on renovating the main house be at 28% CGT --- cannot that gain be enjoyed by owner be CG tax free after living there as PPR for 11 years?

[Incredulum]

Is not the commercial profit (corporation taxable at 20%) of £0.3m mainly dependent on the purchase value of land which engenders the (CG tax-free) gain to be made on the land?

Well, presumably he thinks somebody else would pay him £1.5m for the land. (If they wouldn't, then of course it brings into question the £1.5m value attributed to the property anyway.) After 50% tax, he'll be making only £150k having taken on £1.2m of debt. Personally I wouldn't bother - IF he can really sell it for £1.5m.

Will the gain on renovating the main house be at 28% CGT --- cannot that gain be enjoyed by owner be CG tax free after living there as PPR for 11 years?

s224(3) TCGA 1992; read it.