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Could someone help me on working out the tax implications if

Resolved Question:

Could someone help me on working out the tax implications if I build anew home. I am really struggling to get clear advice , any help will be much appreciated? I have summed up what I think are my two options adding in approximate values, as it may be easier to illustrate with them included! Apologies it's quite long! I currently live in an unmodernised 3 bedroom detached bungalow worth about £600 000 (no.35 ) with no loft conversion. Its roughly in the middle of the property so can’t just build another detached house next to it. As mentioned I have two options: 1) Demolish the bungalow then build two detached bungalows, each 4 bedrooms (going into the loft). I would then move into the new 35a and sell 35. Build cost of £180 000 each house. Sell for £600 000 each 2) Take a side room off the existing bungalow to get some extra land – build 35a on the party wall against 35 and go into the loft on both sides. Ie. Create two semi detached properties, against I’ll sell 35 and move into 35a. Build cost £100 000 for 35 / £180 000 for 35a. Sale price of £575 000 each As I understand in terms of VAT Option 1 will be VAT free on both builds. When I sell 35 do I have to pass the VAT onto the buyer? Option 2 will be VAT free on 35a but not on 35 as that will be just a renovation. I assume I’ll need to split the costs from the builder and claim VAT back on 35a amount In terms of CGT Option 1 I understand that I will not be able to get PPR relief at all on 35 when I sell it as I have never lived there. I’ll move into 35a so any subsequent moves I’ll get PPR relief Option 2 a suggestion has been that I could get part relief – how would that work? Ie that my original 35 (ie the whole property) is £600 000. If I then sell semi-detached 35 for £575 000 its not in HMRC’s favour. I have heard of homeowners who have lived in a detached house with excess land, partitioned off a section of the land and built a property that they subsequently moved into. They have claimed PPR relief on the full amount, as if they have just sold up and moved home, so I assume this is legal. In my case I can’t do that because my house in the middle of the property. Any advice will be much appreciated! Or a reference for a property tax consultant will also be apprecaited! Regards Anthony

Submitted: 3 years ago.
Category: Tax
Expert:  Sam replied 3 years ago.
Hi Anthony


Thanks for your questions

Lets look at the VAT issues first
You asked
When I sell 35 do I have to pass the VAT onto the buyer?
Not if you are selling it as the freehold - and this will be the buyers main residence rather than a holiday/second home

But if you just renovate no 35 - then you cannot build VAT free but still you do not pass the charge on, as you are selling a residential property. And yes you will need to split the costs so you can establish what costs were attributed to the extension build.

Now onto the PPR position

Option 1 Demolish the bungalow then build two detached bungalows, each 4 bedrooms (going into the loft). I would then move into the new 35a and sell 35. Build cost of £180 000 each house. Sell for £600 000 each

You are correct there is no PPR - as your will be starting from scratch but the value of the land and the build can be deducted form the sale cost - so you would need to ensure a valuation was obtained prior to build, and the value apportioned accordingly to each land site.




Option 2) Take a side room off the existing bungalow to get some extra land – build 35a on the party wall against 35 and go into the loft on both sides. Ie. Create two semi detached properties, against I’ll sell 35 and move into 35a.
PPR would then be due on No 35 - for the time you lived there and up to 18 months after you move out. The fact that HMRC will lose out due to the fact you have lessened the value of the property is irrelevant - as this would have been your own residence throughout - its only IF the time between you moving out and the time you sell, exceeds the 18 months period of time, would capital gains even be a consideration, But then as you have the first £11,100 tax free for exemption (as this is your annual exemption allowance) then the capital gain position would be small.
And the fact that you then plan to move straight into no 35A which will attract PPR as soon as you move in (as long as this is when the build is complete) will then ensure this is fully covered for the full period of ownership, as long as it remains your main residence.

With respect to the position you refer to when

Homeowners who have lived in a detached house with excess land, partitioned off a section of the land and built a property that they subsequently moved into. They have claimed PPR relief on the full amount, as if they have just sold up and moved home, so I assume this is legal
As soon as land is portioned off, a capital gain DOES arise, as there is then a clear intent to make a profit. Land sold for redevelopment (even when planning permission has been obtained) has to
1) has been enjoyed as a garden
2) be less than 0.50 hectares
3) Not be partitioned off in any way
can be sold and attract PPR (as long as sold before the main property)
If this remit is not met, then the sale is liable to capital gains tax.

So Option 2 is certainly the more cost effective route - if you sell no 35 within 18 months of moving out.

Do feel free to ask any follow up questions

Thanks

Sam





Customer: replied 3 years ago.

 


Hi Sam


 


Thanks for answering my questions, I just wanted to clearer on a few points:


 


For option 1 (ie 2 new builds)


 


You advised that it's the value of the land and build cost – would that be the value including the current house on it? (I assume done by some RICS person)


Are these calculations correct as an example:


£600 000 (value of current property as a whole, land and house at time of demolishing for new build)


£180 000 X 2 build cost of 2 new detached homes


Sell for £600 000 each home


 


So for new 35 house I will be liable for £600 000 (sale price) - £180 000(build cost) - £300 000 (half of original property price, which is split in two equally) = £120 000


I assume if I sell immediately it will be treated as a development and taxed as income (40% as I am a higher rate tax payer), but if I rent it out it will be an investment and when I do sell it I’d pay capital gains tax on the £120 000?


 


For 35A I will move into – so I won’t be liable for any of the above?


 


 


For option 2


 


I have been told that as I am doing a fair amount of work on the existing 35 (i.e. going into loft and adding value) this portion of extra work will not be part of PPR but I can see you suggest it will be. 35 will still be owned by me until I move into the 35A so it will be a straight move, but I would have had to move into temporary accommodation while the renovations are taking place, only for 3 months though! I am a bit worried about that though. Do you think I will be ok?


 


Regards


 


Anthony

Expert:  Sam replied 3 years ago.
Hi Anthony

Thanks for your response and further questions

No the value of the existing building is not taken into account as you plan to demolish this for option 1 - its the value of the land and building costs only.

So its £600,000 less half the value of the land (after the property has been demolished) and £180,000 build costs - so £420,000

And yes this will be liable to income tax - as you will be deemed to be a property trader with option 1

And yes no liability at all for 35A as this will be your main residence once the build is complete.

Then Option 2

The sale of this property will then be liable to capital gains, so the work (and cost) to build into the loft will be deducted from the profit made (so sale value less purchase value) from which the capital improvements (so the extension into the loft are deducted along with costs to buy and sell)

Then PPR is considered - which should render the whole position tax free - as long as sell within 18 months of vacating the property as being your main residence.

Thanks

Sam



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