Rebuilding or replacing a house and PPR "rollover"?

[CST]

I am the owner/occupier a flat in a end of terrace house. The mortgage is 100k and the flat is worth around 300k. The owner/occupier of the only other flat has been in has a 200k mortgage and his flat is worth around 350k. The house has a parcel of land to the side (which we bought jointly last year), large enough to build at least another 2 flats on. To maximise the development potential of the whole site, architects advise demolishing the existing house, the site would then accommodate 7 new flats. If we incur 40% tax on the full 7 flat development it could easily make the project unfeasible, and we would be forced to under use the site and build just 2 flats.

In a 7 flat build..

1. Would our existing PPR “rollover” into 2 of the new build flats, enabling us to sell them (if they where “substantiality the same”?) – without having to re-occupy them on completion, prior to sale.

2. The half of the site with the existing building would subsequently contain 3 flats, what tax would this third flat attract upon sale?

3. Would any gain on the additional land, due to the increase in value after the granting of PP, or the new dwellings build upon it, attract any exemption.

4. Should we not to return to occupy any of the new flats, could we nominate each of the flats in turn as a second residence, transfer the PPR from wherever we where living (taking them off the rental market of course) prior to a disposal. – I admit this sounds naïve.

5. Can one ever get a binding agreement out of the IR as to exactly tax that will be due when the project is completed before you stick your neck into the noose – or are their decisions simply ultimately arbitrary?

How can I get an answers to these questions that do not contain the phrases “the IR MAY look at it like this” or “the IR COULD say that”? This is a serious question, it takes a great deal of effort to arrive at a project costing and leaving the tax debt to the possible whims of a given tax officer would be insane.

[Ian McTernan CTA]

First, paying 40% tax on a profit does not make a project unfeasible in itself- remember, you pay tax on profit, so you would have to make one in order to pay the 40%. I think what you mean to say is you don't want to pay 40%, which is a different matter altogether.

You need to seek and pay for full professional advice before you go any further along on this project- there are a couple of ways in which you can significantly reduce the tax due on a successful development but you must get it right from the very start. It is far better to pay some fees now and save thousands in tax than be hit for a big tax bill at the end and then ask the profession to dig you out of the hole you dug yourself.

As for 5. and the paragraph below, if tax was straightforward then I for one would be out of a job, and everyone would know exactly where they stand - although judging by the latest Finance Act thickness and complexity this particular dream seems to be disappearing into the distance!

If you want me to take a look at this and suggest a few things, on a fee paying basis, please do not hesitate to email me the query and we can take it from there.

Ian McTernan CTA
McTernan Associates Ltd
Chartered Tax Advisers
ian@imcternan.com

[funcrusherbill]

Beware. Architects are the world's worst businessmen: they are craftsmen-artists spending other peoples money. They crave new build. Any project will likely cost far more than you budget.

Your first stop is to go through the ideas with local planners. Your existing flats sound valuable, hence the tearrace may have merit and demolition permission impossible.

Once you are satisfied about planning prospects, get professional tax advice. I am sure there are ways, including selling your flats to your own development partnership or company. It sounds like a £2m project, so a few hundred in fees is well spent.

[CST]

Thank you both for your comments. The build would be about 1m and their would be little problem with demolition as the terrace has little architectural or historical merit (in fact the existing house spoils the terrace). We've seen planners and they have no problem "in principal" with the outline proposal.

Thanks again.