Converting a barn

[Joanne]

I purchased a barn in March 2000 with planning to convert into a house which I intend to use as my own home when it is finished. I moved into a caravan on site, as I am doing most of the work myslef, shortly after the purchase. I also inhertied a house in October 2002, which I am living in. I intend to sell the inherited property shortly to raise sufficient finance to finish the conversion and was wondering if there would be any tax to pay.

I have some leaflets from the Inland Revenue that says I could make an election for one property to be treated as my home? Can the barn and caravan on site be my home?

The increase in value of the barn is likely to be quite big after it is finished (in approx 6-12 months). The increase in the value of the inherited property is approx £100K.

I would like to try and minimise any tax if possible, as I may sell the barn at some point in the future.

[accountant@uktaxshop]

Joanne,

Firstly your on-site caravan can allow your self build to be treated as your main residence.

There is a relief available for self builds that allows a one year (and up to 2 years with special permission) period of dual ownership with full private residence relief. This could be helpful in your position.

You are correct you can make an election of main residence, so long as this is of fact. You have 2 years from owning 2 properties to make this election.

If you now elect the inherited property as your main residence, the final 36 months of ownership will become exempt from CGT -i.e. you can sell until October 2005 with no CGT. (Although I am surprised you have a £100,000 gain within 12 months.)

The problem then is the Barn - given you may sell it in the future you donÂ’t want a gap in your eligibility for PPR, unless you are planning to sell in the short term.

Given the one year relief for owning two properties there may be something available. However without checking this relief in detail I cannot be certain this would be available to you, given you did not originally live in the inherited property prior to your conversion.

If you would like a proper consultation, please let me know. I think some decent advice could prove to be very worthwhile given your circumstances.

Regards

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436

[Nigel Lord]

Joanne

James has provided some very good advice. I would add the following:

1. As you have a 'pregnant gain' in respect of the inherited property, and are intending to sell within the near future, you should definitely make a PPR election in this respect. The election must be made within 2 years of you first having two main residence available to you, i.e. by October 2004.

2. It would then be possible to vary the PPR election retrospectively up to 2 years in the past (i.e. you would be able to control the period that the inherited property was your PPR to, say to a six month period, or even less).

3. The small period that the inherited property is treated as your PPR would be very unlikely to result in any chargeable gain in respect of the conversion assuming that you continue to reside there for a period of time; and the gain on the inherited property would be eliminated completely (in line with James' advice regarding the '36 month rule').

4. I trust that you have taken appropriate advice regarding the conversion to minimise your exposure to unrecoverable input VAT, if not you may wish to discuss this.

In summary, I suggest that you seek some professional advice to eliminate your exposure to CGT and VAT which, prima facie, should be achievable without significant costs.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk

[pffitch@sayersb.co.u]

On the basis that:

1.You have already decided to sell the inherited property and you know the gain is likely to be £100,000.

2.You probably have not got the cash spare to pay the tax.

3. The barn is not yet finished, you do not know if you wish to sell it and you have no idea of the property market when it is finished. ie what realistic profit you could make.

THEN

Why not take the Principle Private Residence relief as fact on the inherited property for the period from death to sale.

pffitch@sayersb.co.uk

[Nigel Lord]

Where as I agree that Joanne should certainly ensure that she does not pay tax on the inherited property ("tax deferred is tax saved"), I do not agree that she should not make a PPR election. If she is unable to establish that the barn was her PPR during the year that she owned the house, or the period before that, then this could create a tax charge on the sale of the barn.

If Joanne sold the barn in March 2004 with a chargeable gain of say £200,000, 25% of this may not qualify for PPR relief leaving her with a tax liability of as much as £20,000 depending on her circumstances. By making the appropriate PPR elections she could all but eliminate this risk at minimal cost.

Finally, I would comment that based on Joanne's comments that she has been living in a caravan adjacent to the barn, there is some real doubt about which property was her main residence at any particular time. The PPR election would resolve this.

Nigel Lord
Lord Associates