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Where Taxpayers and Advisers Meet

Sale of business with living accommodation included

Joined:Wed Aug 06, 2008 3:45 pm

Postby jeancaroline » Sat Nov 25, 2006 4:31 am

Hello - this is the first time we have used Taxation Web and would be obliged if someone could possibly help clarify our tax position. We sold our business last year (freehold public house) for circa £400,000. We owned the pub for five years and lived in the upstairs accommodation which was our main residence throughout. We did not own any other property during the period. We were advised to obtain a separate valuation for the upstairs private accommodation in order to claim private residence relief on the sale proceeds. We therefore had a valuation carried out by an estate agent who valued the upstairs living accommodation at circa £200,000 and therefore representing 50% of the total sale proceeds for the whole pub. We sent a copy of the private quarters valuation to our accountant. My question is:
(1) Our accountant originally sent through our tax returns and had made no allowance for the private residence and as such CGT was charged on the whole amount (although he had claimed taper relief) We queried this and he then deducted 20% of the sale proceeds as relating to our private residence and sent through amended tax returns. We then queried the 20% deduction in respect of the private residence given that the estate agents valuation of the private living quarters was £200,000. Our accountant said that 20% private element deductions had been used throughout in relation to certain expenses (electric, water rates and heating oil )and therefore could only treat 20% of the sale proceeds as being for the private residence. Is this assumption valid as ideally we would like to claim at least a third of the sale proceeds as being in relation to our private residence area above the pub ?
Many thanks for any comments - apologies for such a long winded question ! !

Joined:Wed Aug 06, 2008 3:46 pm

Postby AvocadoK » Sat Nov 25, 2006 5:39 am

There seems to me to be no good reason to use the 20% figure. Just because 20% of the heat & light costs were treated as private doesn't mean 20% of the value is private - there is no direct relationship between the two.

The computation should be amended and a copy of the valuation should be provided to the Revenue in support of the apportionment.

If the 20% private use adjustment in the income tax computations can be supported (e.g. by reference to the relative size of accommodation) then there is no reason to fear that the Revenue will not accept it just because the valuations are not in the same proportion.

Joined:Wed Aug 06, 2008 3:28 pm

Postby jpcentral » Sat Nov 25, 2006 5:46 am

I would tend to agree with you rather than your accountant. The deduction for expenses etc would not have related to the relative values. It could have been calculated by floor area but this would not have anything to do with the value.

Where a problem could occur is if you had a mortgage on the property and the interest was split 80/20 in favour of the business, thereby implying that the residential portion was only 20% of the value. However, depending on the amount of any deposit, it could be argued that you had paid the greater proportion of the deposit on the residential part (I believe I've seen something to this effect recently).

John Perry
Central Business Services
John Perry
Central Business Services

Joined:Wed Aug 06, 2008 3:15 pm

Postby Instinctive » Sat Nov 25, 2006 10:50 am

50% value for the residential part seems a bit on the high side. But if the valuation could be substantiated, I don't see any reason why your accountant should use any other figure.

I am surprised that the accountant originally made no allowance for the residential part of the property although he/she was aware that you were living above the pub. He then compounds this error by using 20% arbitrarily simply because this was the proportion used for light / heat etc. I am also surprised that he/she completes your tax returns without discussing the figures with you first.

If he now goes back to the tax office to amend the figures, this is unfortunately going to put your return under the spotlight, and in particular the 50% figure may not be readily accepted as may have been the case otherwise.


Joined:Wed Aug 06, 2008 3:22 pm

Postby King_Maker » Sun Nov 26, 2006 2:42 am

Was the Estate Agent who caried out the valuation a qualified Valuer?

If not, I would suggest you engage one, bearing in mind he/she is likely to be required to argue your case with HMRC.

John Perry's point about the split of mortgage interest (assuming 80:20)could impact against you - I am not sure if his argument about the deposit has any wings.

Was there any discount from the Business Rates for the residential aspect - or any discussion on the calculation of the Council Tax with the relevant Rating Authority?

Joined:Wed Aug 06, 2008 3:36 pm

Postby Cynic » Mon Nov 27, 2006 3:26 am

What was the proportion on the initial purchase and how did you value the business for sale?

Was the pub as a business profitable?

Joined:Wed Aug 06, 2008 3:45 pm

Postby jeancaroline » Sat Dec 02, 2006 2:35 am

Many thanks to all those people who have contributed to this discussion. It is appeciated. Addressing some of the points raised:
(1) The estate agent is a qualified valuer - the actual value of the upstairs per the report was in fact about 38% of the overall sale proceeds. My reference to 50% on my first post was slightly adrift.
(2) There was no mortgage on the pub and so the interest point is not relevant.
(3) We paid separate council tax for the upstairs living quarters - it was Band C or D I believe. We do not believe there was any discount from business rates for the residential element.
(4) We acquired the pub for about £100,000 - it was virtually derelict and un-used at the time. We were approached by a large brewery chain and decided to sell some years later. The split of sale proceeds per the figures on our tax returns looks like £50,000 goodwill with the rest just as proceeds. We have received no information as to the figures on the tax returns or any indication as to the tax due - the boxes have been left blank - presumably for the Revenue to work it out ! We were just asked to sign and return.
(5) Fortunately we are still holding our tax returns and have not signed or returned them to the accountants (Accountants / Stocktakers).

We would be obliged if some of the people who have contributed could leave contact details as we may decide to approach someone else with the relevant expertise to look things over and submit our 2006 tax returns. Many thanks in advance.

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