I have a slightly unusual situation that I am struggling to find a clear answer to. Circumstances as follows:
My wife and I purchased Property A as our main (and only) residence in 2016. Property A has a flying freehold, whereby one of the upstairs bedrooms is in fact part of neighbouring Property B (i.e. Property A has one fewer bedroom than it should have). As I understand it, at some point in the distant past Properties A & B were one larger property, which was subsequently split up in this unusual way.
In 2019, we purchased Property B and moved into it while retaining Property A and letting it out. We now live in Property B as our main residence and we paid the full additional 3% stamp duty on the purchase. Property A is unencumbered, Property B is mortgaged, both are owned in our joint names.
My ultimate goal is to remove the flying freehold, by "returning" the bedroom to Property A and effectively creating two normal houses. This will significantly increase the value of Property A (for obvious reasons), which will then be sold. It will have a much less significant impact on Property B.
I want to do this in the most tax efficient way possible, so I have two questions:
1) How will the bedroom being transferred from one property to the other be valued? I can't sell it to myself, so I don't see how this would be calculated. We are outside of the window for full PRR on Property A so any gain will be taxed and could be quite significant.
2) An alternative I have considered is if Property A were initially sold to a Ltd Company to operate the rental business, would it then be possible for the company to buy the bedroom for effectively the amount by which it increases the value of Property A (which seems to me to define the "market value" of that bedroom). This would limit the size of the capital gain in the company, and lead to a larger value disposal of part of Property B, where I think we would benefit from PRR. I will also be able to recoup the additional stamp duty initially paid on the purchase of Property B in 2019, which will be greater than the amount owed by the company on the transaction (by approx £10k) and therefore negate any SDLT implications.
Any help gratefully received!
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