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Where Taxpayers and Advisers Meet

Sale of 2nd property in the garden of 1st property

B.Jones
Posts:1
Joined:Tue Aug 29, 2017 5:52 pm
Sale of 2nd property in the garden of 1st property

Postby B.Jones » Tue Aug 29, 2017 7:41 pm

Hello,
I’ve been trying to find the answer to a property tax question for a week or two but so far haven’t found the answer.
As such, I have joined TaxationWeb as this seems to be the most informative of the sites in the hope that one or more of the many experts who contribute here might be able to help.

I’m in the fortunate position where I have spent the last 18 months building a second house in the garden of our main residence with the intention of us moving into it once complete, then selling our original home.
This is a one off event and we’d likely live there indefinitely and FYI, we’ve lived in the original house for 20 years.
I believe this is also quite a sensible plan in terms of tax, as doing this means we can sell our original house CGT free under PRR.

However as we get nearer to the day when the new house is finished, we’re considering what would be the implications if we sold the new house instead of the old one.

My reading so far indicates that if we did sell the new one rather than moving into it, we would be taxed something on the profit realised, be it either CGT or PIC.
(I imagine a discussion might follow as to whether its CGT or PIC, but that isn’t the primary question at this moment.)

My question is, what value would I assign to the plot when working out the taxable profit?

So to give some background, go back a couple of years before we started laying bricks, we had the overall site valued including the empty building plot.
At that time, the existing house and its smaller garden was worth about £450k. The new empty plot was worth £150k.
I understand that if I had sold the plot to a builder, then that £150k would have been tax free (as would have enjoyed PRR).
Note then, that of the overall site value of 600k, the plot was worth ¼ of that, namely 150k.
Also note that back in 1997 when we bought the place, we paid £150k for it, so one might say that back then, the plot was worth £37k5 (ie also a ¼).

So, when I work out the taxable profit for the new build once completed, lets use hypothetical round numbers and say it gets sold for £500k and the costs (excl the land) for building it are £250k.

Would my taxable profit be: £500k sale – £250k costs – £150k land (tax free) = £100k ?
Or possibly: £500k sale – £250k costs - £37k5 land (tax free) = £212k5 ?
Or even more appallingly… £500k sale - £250k costs – sod all for the land = £250k?

Intuitively I feel that I should be able to use / deduct the actual value of the land on the day we started building, ie £150k land cost as that was the price I could have got for it if I’d sold it to a builder (tax free), but fear the tax man might see it differently, possibly using the 1997 value of the land at £37k5 which is what I effectively paid for it.

If anyone has any wisdom of this, and better still can reference the appropriate sections in tax law I would very much appreciate it.
Many thanks :-)

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Sale of 2nd property in the garden of 1st property

Postby maths » Sat Sep 09, 2017 6:36 pm

It is highly unlikely that any gain on the sale of the land plus newly built house will be subject to CGT.

Hypothetically, were it to be subject to CGT the normal approach would be to treat the disposal as a part disposal for CGT. The original cost of 150k would need to be apportioned. Using the A/[A + B] formula with A 500k and B 450k gives an apportioned cost of 80k.Add the building cost of 250k gives 330k.Sale proceeds of 500k gives gain of 170k. No reliefs available.

It is more likely that any gain will in fact be treated as a profit subject to income tax. The profit would equal 500k less building costs plus market value of the land as and when building works commenced ie 500k - 250k - 150k ie 100k. Any gain arising on appropriation to trading stock being covered by private residence relief.


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