Thanks for your question - I am Sam and I am one of the UK tax experts here on Just Answer.
Yes you can sell the first house to finance the buld, and this house sale will not give rise to capital gains as its been your main residence from the date you inherited - and will remin so right up to the sale, and as long as you move into the new build as soon as its ready - then you will remain as being due exemption to capital gains (under the private residence relief rules) on the new build. (so it does not have to be that the new build is ready as soon as the orignal property is sold)
However if you sell the land with building permision for a developer to build on, then there may be capital gains, If the total land (so what you plan to sell, and your land where the original property is situated) is less than 0.50 hectares and if it is then also make sure that
1) you enjoy this land as a garden right up to exchnage of contacts tos ell the land and
2) it is not fenced or cordoned off - right up to the date of sale
I hope that has offered you each position and what it means in terms of the capital gains position. let me know if you wish me to expand on any of the information I have provided.
Is 2) important, as it seems sensible to have fence or even a rope to show boundary of the two gardens to potential buyers of house. Although I suppose a temporary fence might be in order, to be removed on Sale agreed, and replaced with proper one on completion? Would that work?
Are you saying that work could not be started on the separate plot till after sale of original house. Also how long do you have to live in new house to establish principle private residence, as we would like to move on.
Number 2) is important as to fence or cordon off the land suggests an intent to profit - where as to leave it as a garden enjoyed up to the date of sale, makes its less so - an odd rule I do agree - but none the less one that HMRC rules by!
So no temp fence,no cord no nothing - can be permitted.
If your next question - work cannot be started on the seperate plot until after the sale of the original house, no - thats not right - you stated that
"Can we sell our house first to finance the build, does this break the principle private residence thing"
So this suggestd that you would sell then build - thats all - but if you start the build before you sell the original house, then you have 12 months to move into the new property (so the build must be completed within 12 months for you to waulify for private residence relief for the whole period from start of build to sale - assuming this stays your main residence throughout)
However you then suggest that you will sell this new build as well - the time you spend there has to be of a qualatative nature (so all aspects of your life conducted from here - so DVLA, passport, bank details, doctors and dentists all with this new address) and if you then go onto move out and sell after that move out - then you have up to 18 months before capital gain would be considered on any profits made..
Am I too late for a small follow up? Have now decided to obtain planning for building plot in garden then sell as package, house and plot together.
In brief, our tax position please.
I think my run of the mill accountant will be able to cope now thanks.