Splitting PPR in to 2 properties

[matwils]

My wife and I live in a double fronted upper maisonette in a 4 storey terraced house. We have lived there as our PPR for 10 years and we are both higher rate tax payers.

The lower ground flat is coming on to the market for sale and we are thinking about buying it. If we bought it then we would end up owning the entire building, albeit comprising a freehold title and 2 leasehold titles for the maisonette and ground floor flat.

If we owned the entire building we would consider splitting the property vertically into 2 houses. This is how the property originally was prior to someone knocking through the party wall many years ago. We would live in 1 house and potentially rent the other one out for a period, although it is likely that within a few years we will want to move. When we do decide to move then we might just sell everything or we might rent out both houses and sell them several years down the line.

Under all scenarios (1 house / 2 houses / 2 flats) there will be significant construction costs involved.

We could of course just keep the property as one giant house, but it’s current market value would be around £1.2m, whereas the 2 houses combined could be around £1.7m. If we just kept the property in it’s current format as 2 flats then the market value would be around £1m.

We want to minimise our tax liability when we do eventually decide to sell. So my questions are:

1) Is there anything we should do when buying the lower flat to minimise our future tax liability?

2) Is there anything we should do when dissolving the existing titles and creating 2 new freehold titles to minimise our future tax liability?

3) Would we be considered to be property developers by HMRC for doing this?

Sorry if this question has already been asked, and for the vagueness of my questions. I did search the forum for similar situations, but the only post I could find that was close to our situation was http://www.taxationweb.co.uk/forum/subd ... 87-10.html

Thank you.

Matt

[LozaACCS]

There are both legal and tax issues regarding your post.
From the details supplied you appear to have a leasehold interest in part of the property, the freeholder retains the land and presumably charges you for a ground rent.
I think he will have something to say about the plans since he owns both the land and the buildings on which it stands.
You own a chose in action (a lease) the value of which will depend on the duration of the lease.
If it is a long lease (say 100 years) then its value will approximate to the value of the property)
If the reversion is in sight, (say 5 years) then the value of the lease is the compounded value of the current ground rent adjusted to the then market value.
So I think you should look at your lease before going any further and seek formal advice.
I do think the plans could be construed as property development.

[matwils]

Hi Loza,

Thanks for your reply. I should have explained that we have already taken legal advice on the title. We anticipate being able to buy both the lower flat leasehold and the freehold. As such we would own the freehold of the entire building. We do not anticipate any problems with this stage.

The question then is whether after purchase we just incorporate the lower flat into our property to create 1 large house which will be our PPR, or do we split the property into 2 houses in the way I suggested. We are not clear on the tax implications of doing the latter.

Best regards,

Matthew

[King_Maker]

If the retained property(s) are rented out for a reasonable length of time, then CGT would be payable at a maximum of 28% on the relevant gain(s).

If the transactions were treated as property development, then Income Tax at a maximum of 45% would be due - plus NI.

You need to take professional advise before embarking on this project.

[matwils]

Hi King Maker,

Thanks for your reply. Yes, I plan to get formal advice from a tax expert soon. I'm just doing a bit of preliminary research so that I know what questions to ask.

The "reasonable" length of time to rent it out for in order to fall back in to the CGT category is interesting. I was also wondering whether us living in the property for a period before renting it out may help. For example we may split the property into 2 houses, sell our PPR, then move in to the other house for a period before then renting it out. Then a few years later we may sell that property. We have a lot of flexibility in our living arrangements.

Thanks again,

Matthew