Postby jbaileycta@btopenwor » Tue Aug 23, 2005 8:51 am
Dear Puffinette
Whatever you do, don't put the costs of conversion through your business books - this will make the conversion and sale into a trading venture, liable to income tax not CGT, and will prejudice your relief for main residence.
I have explained in my previous two answers how the calculation works. The point is, the conversion was done to realise a profit by selling the downstairs flat, so relief for main residence is restricted. Note it is only restricted, not taken away altogether - in fact you may well find that the gain not covered by the exemption is quite small.
The same sort of restriction will apply when you eventually sell the upstairs flat, because a house divided into two flats will fetch more than the same house not divided, and the "extra" part of the gain that is a result of the division of the house is not exempt from CGT.
Have you looked at CG65271 yet (see my reply of 10 August)? Go to the Inland Revenue's website, click on "practitioner zone" in the top RH corner of the home page, then click on "manuals" in the "library" section, then on "Capital Gains Manual", and find paragraph 65271. This gives a detailed explanation of how to do the calculation, both for the sale of the first flat and for the second.
The gain on the sale of the flat sold in July 2005 (calculated according to CG65271)should be reported in the Capital Gains section of your return for 2005/2006. The conversion costs are treated as shown in CG65271, and form part of the calculation in the 2005/06 return.
I hope that covers all your questions.
Regards
James Bailey
Chartered Tax Adviser