part sale of main residence

[twalshsr@aol.com]

I wish to convert my 3 storey home into seperate flats . i intend to sell the basement flat and to remain in residence in the upper flat for 2 years before also selling it.
will i have to pay capital gains tax on any of the sales ?

[accountant@uktaxshop]

As you are planning to remain in the upper flat, there will be no CGT to pay on this as it will remain your PPR.

On the basement flat there would be a liability equivalent to:

The sales price
less half costs of conversion
less specific costs of equipping new flat
less fair value of the basement prior to conversion.

The last bit is the more interesting. Basically you could take the value pre-split and divide by say floor space or any other reasonable split. Obviously the bigger the value, the lower the tax.

You would also get your personal allowance of £7900, and if you have a partner in joint ownership, their personal allowance to consider.

If you need some help filling in your CGT form or estimating your liability for a small fee, please get in contact. I take it you will also need some legal help for dividing the property. I know a very competent and reasonably priced solicitor you can use if you are interested.

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

[John Day]

I hesitate to disagree with James, but I would like to know the basis on which he says you can effectively take the "cost" of the basement flat as it's value "pre-conversion". Would it not be appropriate to calculate the gain on the basis of the sale proceeds less the (apportioned)original cost of the property applicable to the basement flat less, of course, the proper costs of conversion, indexation, taper relief etc. You would then need to time apportion the resultant gain (taking into account periods of occupation as the principal private residence - including the last 3 years of ownership and other reliefs)to arrive at a net chargeable gain against which you would set the annual exemption (not the personal allowance) for CGT purposes.

Sorry to add a contrary view at this stage.

[twalshsr@aol.com]

I appreciate the replies to my query so far.
what still puzzles me though :
if i were to sell my home as a whole without converting to 2 flats i would pay no GCT.
why then should i pay GCT if i sell the house as two separate flats.
because i am having difficulty selling the house as a whole it would be easier to convert and sell as separate flats, the profit made after paying for conversion would be roughly the same

[accountant@uktaxshop]

John,

disagree by all means, it makes things more intresting.

I think you have the option here, doesnÂ’t an apportionment just have to be "fair", when you are making 2 assets out of one? IÂ’ll go dig out the legislation if I have time today.

To take the cost I would take the pre conversion value of the whole building on the day before the builders arrive. Given the general huge rise in house prices, I thought this would give a higher base cost.

However your method may well prove to be equally efficient. I think it would be calculator time to get the best method.

Whether you could claim PPR on the basement flat for the last 3 years is interesting. You have occupied the property, but not post conversion. Is there some case law or guidance notes on this topic John? I have the feeling the IR wouldnÂ’t like you trying to claim the exemption, from what is essenitaly a money making exercise.

Of course the other issue is whether this is a "trade" and therefore subject to income tax not CGT....

[accountant@uktaxshop]

Ah if there is no profit - there is nothing to pay under any scenario.

You would need howver to record the sale on your tax return.

You will have to excuse us bean counters, we get excited easily.

[John Day]

Answering first the second posting from "twaslshsr", the reason why CGT is applicable is that you would (on conversion of your existing dwelling house into two flats) no longer occupy the WHOLE of the property as your Principal Private Residence (PPR). CGT would then apply to that part of the property as from the date it ceased to be so occupied.

To answer James' points:
1. I'm still not convinced by your suggestion that you can simply "value" the property in it's "pre-converted" state and then divide that between the tw "post-converted" properties. I'd be interested to see the legislation or hear views from others on this.

2. The availability of relief in relation to the last three years is contained at Sec 223 (2)(a) TCGA 1992 which states ".........a fraction of the gain shall not be a chargeable gain, and that fraction shall be......the period of ownership during which....the dwelling house was the individual's only or main residence, but inclusive of the last 36 month's of the period of ownership IN ANY EVENT......".

3. I agree that no relief whatsoever would be available if the IR successfully contended that Sec 224 (3) of the same act were in point, whether or not they set out to establish whether a trade existed (unlikely if this were the only such transaction) liable to income tax rather than CGT.

[accountant@uktaxshop]

John - I think you are correct, and I am mistaken with my initial valuation approach, so thanks for stepping in there.

Regarding (2), that "in any event" clause is pretty handy.

So in this instance PPR would be available for the whole period (including post conversion) and remove any liability to tax.

[John Day]

James - thank you. Yes, if the basement flat were then sold within 3 years of it ceasing to be the PPR, the gain would effectively be relieved from CGT (barring application of Sec 224(3)of course).

What surprises me, however, is the statement that even after the costs of conversion, the profit would be the same as if the house were sold as one?

[twalshsr@aol.com]

So helpful this website..thanks to those who take the trouble to advise and discuss matters.

In response to James query regarding profit after conversion V profit on property as it stands.

profit was a poor choice of words . what I should have said was selling as two flats would realise more than selling the house as it stands. but after the cost of the conversion is deducted the difference is minimal . I would be no better off except that I would be able to sell a property that is proving hard to sell because of its location and size e.t.c. but back to the main issue if doing things this way incurred capital gains tax then it would not be feasible to convert the house . as the house is my home and only property it would seem unfair that I could not sell it in two stages so to speak without penalty..