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Should a property that was initially a main residence be converted into flats and sold, Principal Private Residence (PPR) relief will be denied in respect of the gain attributable to the period of ownership whilst the conversion is taking place as the expenditure has been incurred ‘wholly or partly’ for the purposes of realising a gain.

For the calculation a valuation of the property as not converted is required and then that figure is compared with the sale price post conversion in order to establish the additional profit attributable to the conversion.

Example:
Tony lived in a property as his main residence from the date of purchase in July 1996 (cost = £100,000) to July 2012 when work commenced on conversion into three flats. Work was completed in December 2012, the flats finally all being sold in June 2015 for £250,000 each.

The conversion cost was £150,000. If the property had remained as one house the sale proceeds would have been £550,000.

The additional expenditure for conversion generated an additional gain of £50,000 calculated as follows:

                                           Total Gain      Exempt PPR Gain    Taxable Gain
Proceeds/valuation                £750,000              £550,000              £200,000
Original cost of property        £(100,000)            £(100,000)         
Conversion expenditure         £(150,000)                                      £(150,000)
Gain                                     £500,000              £450,000               £50,000

Less annual exemption, if available.Save