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Sam
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Sam I have some property development options and would

Resolved Question:

Hi Sam
I have some property development options and would like to understand the potential cgt implications.
I bought a house in April 2011, gutted it (it was not in a liveable state) and extended it with the hope my father and brother would move in. They never did move in and I don't really need what is now a 5 bed house.
At the end of 2014, a 3 bed semi came onto the market (price £375k) and I decided it would suit me better. It also has a plot to the side which I thought I may be able to self build on at some stage (a long held dream). A quick purchase was required, so I bought it on a BTL mortgage and put the first house on the market in November.
The new house completed in December 2014, and the first house was not getting much interest (asking price £450k), so I decided to rent the first house on a 6 month tenancy, thus covering the additional mortgage payments.
Questions:-
1) If I eventually move into property 2, will the fact I have downsized in number of rooms and value cause any issues in claiming PPR on both properties?
2) If I move into house 2 within 1 year of purchase, once house 1 is sold, am I right in thinking that first year or ownership will also be exempt from cgt? Or does that exemption not exist where the new property is rented out?
3) If I eventually move into property 2 (becoming my PPR), then get planning for a new house in the garden, will a cgt (or even IT) liability arise if-
3a) I sell the plot to a developer
3b) build the new house myself and then move into it as my third PPR, either selling property 2, or renting it again?
4) As I have a happy tenant living in house 2, if I can get planning for the new build house in the garden, what would be the cgt situation if I build and move into the new house as my PPR?
4a) I believe I would have to pay cgt on the gain in plot value, as it is part of a btl investment, using the a/(a+b) rule. Is that right?
4b) Or would there be no cgt to pay as I make the new build house my PPR? If this is the case, how is the cg or loss on house 2 calculated? Given it will have less land, with no future development value, it will probably be worth less, but I suspect I could not claim that as a capital loss when said loss has arisen from losing part of the land originally purchases.
5) What would be the most tax efficient way to handle this opportunity?
Thanks for the advice
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.

Hi

Thanks for your question and asking for me

Have you ever lived in Property 1 - which si the extneded 5 bed or property 2 the 3 bed that you put on the market shortly after purchase.

If you have never lived in either of these then where have you been living?

{Please clarify which property is which as you talk of a new build - which I assume is attached to the 3 bed semi - and then the 3 bed semi and the initial purcahse whcih you extended = that makes 3 properties already but you make reference to only ywo....?

Thanks

Sam

Customer: replied 2 years ago.

Hi

Property 1 was bought April 2011, renovated and extended, until March 2012. I moved in march or april 2012 and have been living there ever since. This house is currently for sale with a view to moving to property 2.

Property 2 is a 3 bed semi so more suitable for just me. I bought it in December and rented it out in Jan because property 1 was not selling. Property 2 is not currently for sale.

The new build is a potential property 3, if I can get planning in the side garden of property 2. It would probably be detached but may be attached if that is all planning will allow.

I hope that is a bit clearer.

Expert:  Sam replied 2 years ago.

Hi

Thanks for your response

Ok with property 1 you have 18 mionths from any date you choose you move out to sell, and still have the time you lived there and up to the last 18 months of ownership exempt from capital gains - (and U assume the time when the renovations were ongoing from April 2011 to March 2012 that the property was inhabitable) so the whole period of ownership would then be exempt.

Property 2 already has formed a capital gain position, as you purchased and let it out so this will never change that period of time of, so far 4 months when this was not your main residence.

And any build on the land is likley to attrcat capital gains unless this once built (with a 12 month period) becomes your main residence.

So to specifically answer your questions

1) If I eventually move into property 2, will the fact I have downsized in number of rooms and value cause any issues in claiming PPR on both properties?

Downsizing has no bearing on the capital gain position and property 2 laready has a capital gain position that exisits due to the fact this wa snot your main residence from the purchase date to now, and has been let out since Jan to date

2) If I move into house 2 within 1 year of purchase, once house 1 is sold, am I right in thinking that first year or ownership will also be exempt from cgt? Or does that exemption not exist where the new property is rented out?

Yes property 1 will be exempt as you have up to 18 months from moving out to sell a property that had previously been you main residence throughout - before capital gains arises.

3) If I eventually move into property 2 (becoming my PPR), then get planning for a new house in the garden, will a cgt (or even IT) liability arise if-
3a) I sell the plot to a developer- Capital gains will arise
3b) build the new house myself and then move into it as my third PPR, either selling property 2, or renting it again?

Then the new build will not be liable to capital gains IF you build within 12 months and stay living there throughout the period of owmnership OR sell within 18 months of a move out.

But property 2 will always have a capital gain position ariisng as advsied above.

4) As I have a happy tenant living in house 2, if I can get planning for the new build house in the garden, what would be the cgt situation if I build and move into the new house as my PPR?

As advised at 3)
4a) I believe I would have to pay cgt on the gain in plot value, as it is part of a btl investment, using the a/(a+b) rule. Is that right? NO as advied abobe
4b) Or would there be no cgt to pay as I make the new build house my PPR? If this is the case, how is the cg or loss on house 2 calculated? Given it will have less land, with no future development value, it will probably be worth less, but I suspect I could not claim that as a capital loss when said loss has arisen from losing part of the land originally purchases.

Yes asa dvsied above

5) What would be the most tax efficient way to handle this opportunity?

Build 3 (within 12 months)- move into 3 - sell 1 withihn 18 months of moving out

and either retain 2 or sell 2 - knowing there is capital gains to consider, on which you cannot alter that fact.

Much is dependent on whether you are looking for a short term or long term investment and I am sure you can appreciate, us tax advsiers are not financial advisers - so to offer advsie beyond that,m would not be within our remit!

Let me know if you wish me to expand on anything, but it would be appreciated if you could rate me for the service I have provided.

Thanks

Sam

Customer: replied 2 years ago.

Hi

Thanks, ***** ***** is not all clear to me yet, mostly because I may noy be asking the questions clearly enough.

You state:-

" Ok with property 1 you have 18 mionths from any date you choose you move out to sell, and still have the time you lived there and up to the last 18 months of ownership exempt from capital gains - (and U assume the time when the renovations were ongoing from April 2011 to March 2012 that the property was inhabitable) so the whole period of ownership would then be exempt."

Did you mean UNinhabitable?

Do I understand correctly that the first 12 months of ownership of property 1 is cgt free because it was undergoing renovation?

Quote "And any build on the land is likley to attrcat capital gains unless this once built (with a 12 month period) becomes your main residence."

When does that 12 month period begin? The day it is signed of as completed by building control?

"2) If I move into house 2 within 1 year of purchase, once house 1 is sold, am I right in thinking that first year or ownership will also be exempt from cgt? Or does that exemption not exist where the new property is rented out?"

I was not clear, but this question related to property 2. As I understand it, where you buy a new property to move into, but delay moving in for a period up to one year, due to the sale of your original property taking time, maximum period of one year will be exempt from cgt, even if it has not yet become your PPR. Is that correct?

If that is correct, does that exemption disappear if you let it out during that first year?

Quote "3) If I eventually move into property 2 (becoming my PPR), then get planning for a new house in the garden, will a cgt (or even IT) liability arise if-

3a) I sell the plot to a developer- Capital gains will arise"

I appreciate that cgt may apply on the eventual sale of property 2, because it has for a time been let. Are you also saying that if I move into property 2, therefore becoming my PPR, gain planning on the attached plot (currently part of the garden of property 2), and sell the plot to a developer, that cgt will be payable on the plot sale? If yes, then why? I thought that sale of part of a garden of a PPR is cgt exempt.

Quote "3b) build the new house myself and then move into it as my third PPR, either selling property 2, or renting it again?

Then the new build will not be liable to capital gains IF you build within 12 months and stay living there throughout the period of owmnership OR sell within 18 months of a move out."

IF I build within 12 months of when?

Quote "5) What would be the most tax efficient way to handle this opportunity?

Build 3 (within 12 months)- move into 3 - sell 1 withihn 18 months of moving out

and either retain 2 or sell 2 - knowing there is capital gains to consider, on which you cannot alter that fact."

OK, if I follow that route, how will cgt on property 2 be calculated, bearing in mind that a chunk of garden of property 2 will have been separated to build the new house that I move into? I ask this because property 2, when sold, will have a lower value due to having less land attached, so I suspect I cannot offset the full purchase price of property 2 in calculating the capital gain. To use some numbers, property 2 purchase price incl costs was £390k, probable sale value would only be £325k without the garden plot. That would give rise to a loss of £65k, but is essentially the cost to me of the plot I built my new PPR on.

Thanks, ***** ***** I will be happy to leave a rating when I have understood it.

Expert:  Sam replied 2 years ago.

Hi

Apologies typo error uninhabtable is the word I meant to use, thanks for pointing this out!

You then ask

Do I understand correctly that the first 12 months of ownership of property 1 is cgt free because it was undergoing renovation?

Yes so 12 months from the date of purchase HMRC permit to make it habitable

Quote "And any build on the land is likley to attrcat capital gains unless this once built (with a 12 month period) becomes your main residence."

When does that 12 month period begin? The day it is signed of as completed by building control?

Thw 12 months date starts when you start work on the land to build

"2) If I move into house 2 within 1 year of purchase, once house 1 is sold, am I right in thinking that first year or ownership will also be exempt from cgt? Or does that exemption not exist where the new property is rented out?"

I was not clear, but this question related to property 2. As I understand it, where you buy a new property to move into, but delay moving in for a period up to one year, due to the sale of your original property taking time, maximum period of one year will be exempt from cgt, even if it has not yet become your PPR. Is that correct?

No thats not correct

If that is correct, does that exemption disappear if you let it out during that first year?

No as it doesnt exist in the first place

Quote "3) If I eventually move into property 2 (becoming my PPR), then get planning for a new house in the garden, will a cgt (or even IT) liability arise if-

3a) I sell the plot to a developer- Capital gains will arise"

I appreciate that cgt may apply on the eventual sale of property 2, because it has for a time been let. Are you also saying that if I move into property 2, therefore becoming my PPR, gain planning on the attached plot (currently part of the garden of property 2), and sell the plot to a developer, that cgt will be payable on the plot sale? If yes, then why? I thought that sale of part of a garden of a PPR is cgt exempt.

No as you would have plannd to make a profit from it - so clearly had not enjoyed this as a garden but saw this as an oppotunity to make a profit.

Quote "3b) build the new house myself and then move into it as my third PPR, either selling property 2, or renting it again?

Then the new build will not be liable to capital gains IF you build within 12 months and stay living there throughout the period of owmnership OR sell within 18 months of a move out."

IF I build within 12 months of when?

From the start of the build

Quote "5) What would be the most tax efficient way to handle this opportunity?

Build 3 (within 12 months)- move into 3 - sell 1 withihn 18 months of moving out

and either retain 2 or sell 2 - knowing there is capital gains to consider, on which you cannot alter that fact."

OK, if I follow that route, how will cgt on property 2 be calculated, bearing in mind that a chunk of garden of property 2 will have been separated to build the new house that I move into? I ask this because property 2, when sold, will have a lower value due to having less land attached, so I suspect I cannot offset the full purchase price of property 2 in calculating the capital gain. To use some numbers, property 2 purchase price incl costs was £390k, probable sale value would only be £325k without the garden plot. That would give rise to a loss of £65k, but is essentially the cost to me of the plot I built my new PPR on.

Calcualting the capital gain is over and above what you asked for within y

post to Just Answer, If youw ish this additional work to be undertakent hen I can either

1) Send an additional Q & A request for an additional free which can be actioned after you rate the initial service OR

2) Post a new question after rating this one

But I will advise that whilst Property 2 will have a lower value to a chuck of land being removed - the value of that chuck of land then is taken into account with the new build -

The fact you choose to reduce its value of Property 2 - will be reflected in so far as that, the sale value would be less

Thanks

Sam

Customer: replied 2 years ago.

Hi

Thanks again, mostly clear now with one piece unclear.

I am not asking you to calculate the gain, no numbers are certain yet so it would be pointless. And it is not a new question. I included numbers just to help give clarity.

My original question was "4b) Or would there be no cgt to pay as I make the new build house my PPR? If this is the case, how is the cg or loss on house 2 calculated? Given it will have less land, with no future development value, it will probably be worth less, but I suspect I could not claim that as a capital loss when said loss has arisen from losing part of the land originally purchases."

I am sure it cannot be right that, having built a new PPR on the plot that was part of property 2, when I sell the reduced property 2 for less than the total original purchase price, I can claim a capital loss.

I don't think it is right, because I will have gained the plot that went on to become my PPR.

So, do I have to attribute a portion of the total original purchase price to the value of the plot, making it more likely that when I sell the reduced property 2, it will be at break even, or even a gain?

Thanks for clarifying this last point.

Do you provide private tax accountancy services, and if yes, how do I contact you?

Thanks

Neil

Expert:  Sam replied 2 years ago.

Hi

Thanks for your further questions

You ask My original question was "4b) Or would there be no cgt to pay as I make the new build house my PPR? If this is the case, how is the cg or loss on house 2 calculated? Given it will have less land, with no future development value, it will probably be worth less, but I suspect I could not claim that as a capital loss when said loss has arisen from losing part of the land originally purchases."

This can only been shown with a calcualtion which is over and above what you originally asked for, but I can advise that

The gain is the sale price (which will be reduced due to the fact that there is less land) less the purchase price (which will be the original purchase price which you apportion to reflect the new sixed land and property - and may need the district valuerer to help with this)

This forms the intial gain from which you can deduct the costs to buy and sell (so legal and estate agent fees) and ay major capital improvements such as new kitchen

Then the figure left over is considered for tax reliefs, so the PPR for the time you lived there and if you move out prior to sale, this time up to a maximum of 18 months.

Then private lettings relief, which is up to a maximum of £40,000 (and assuming all rental income is declared to HMRC) but is the lesser of 1) The amount of gain on which PPR is due 2) The amount of gain left over after PPR has been aplied or £40,000

Then what is left over - can allow the first £11,000 exempt as this is the annual exemption allowance

Then with the new build, the value of the land at the time you are to begin the new build, is taken into account (so this land will need valuing)

I am afraid we cannot offer direct one to one services with customers we affilate through with via Just Answer (as its not permitted by them) but ALL good accountants can manage capital gains for you.

Thanks

Sam

Sam and 2 other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Great, thanks.

All clear, except this.

"Then with the new build, the value of the land at the time you are to begin the new build, is taken into account (so this land will need valuing)"

Just to be sure, what is the valuation at commencement of build used for? You had said earlier, if I understood correctly, that the plot, when used to build a new PPR, would not be subject to cgt, as long as I move in within 12 months of commencement of build.

Thanks for the patience, you have been most helpful.

Neil

Expert:  Sam replied 2 years ago.

Hi

Thanks for your furthehr questions

The value of the land is needed because if your plans change then the cost of the land, the build and any other associated costs would be on record incase this has any capital gain consideration in the future.

Thanks

SWam