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TonyTax
TonyTax, Tax Consultant
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I am going to split our family home into two separate units,

Resolved Question:

Hi
I am going to split our family home into two separate units, the downstairs lounge and garage and upstairs bedroom and bathroom and dressing area will be big enough to make a small 2 bed unit.
I may sell or rent it not too sure.
How do i minimise the tax liability on this? It could be argued that the new unit would be (was) our main living areas lounge and bedroom, and so was our main residence and then we just reside back in the other part of the house, a modest 3 b3d semi.
Neither properties will be particularly coveted or expensive, circa 230k smaller unit and 250k older part house.?
Any help appreciated!!
Regards
Alan.
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.

Leave this with me while I take a look at it. I've answered similar questions to this in the past and there is a fair amount to consider so please bear with me.
Customer: replied 1 year ago.

Ok

Other things to consider, could i gift a property to my partner, we are unmarried, or i have been advised that need to sell the house we are registered at and then move into the other smaller new bit!! Seems bizarre and pointless, surely we are just doing this in reverse and could sell or rent new bit and stay residing in original house and live happily ever after without being stung for it!!??

Expert:  TonyTax replied 1 year ago.
I'll take a look at that.
Expert:  TonyTax replied 1 year ago.

Hi again.

You should refer to the notes here and here as part of this answer.

If you convert your house into two separate dwellings and sell one immediately, that part of the gain which can be attributed to the development will not be exempt from CGT. This is because you will have carried out the the conversion with a view to making a profit.

In order to determine any non-exempt gain, you will need to have the house valued as it is immediately before you convert it and then have the two new properties valued immediately after the work has been finished. You deduct the value of the single dwelling before the work started along with your development costs and you are left with the gain attributable to the development. That then has to be divided between the two new dwellings. Each non-exempt gain will be charged to CGT when the properties are sold. There can be no CGT until a property is sold or gifted away.

If you make a gift to your partner, there will be CGT implications as if you had sold the property to a third party for cash for you so there probably isn't any value in doing that but the figures would need to be looked at once the development profit is known.

As I said earlier, part of the gain you make on each flat if and when they are sold will be taxable and part will be exempt. If you let the new property that you aren't living in, you will accumulate some letting relief which you can read about here as this property will have once been part of your main residence.

With regard to Example 4A, I'm not convinced that the apportionment of the £85,000 gain is correctly done though the authors have assured me that it has.

I hope this helps but let me know if you have any further questions.

Customer: replied 1 year ago.

Hi

Thanks for that, example 4a is exactly almost word for word the predicament i will be left in..

So value of my house is £370k at mo, conversion will make value of converted smaller house £230k, which i could sell, value of the larger house i will live in and retain for now would be £270, conversion approx £40k as the illustration.

Couple questions?

So i can sell small one and move into bigger one and no CGT due until i sell the 2nd one?

After allowances (how much is that?) what will be my likely liability, and can they demand it before i sell it?!

Thanks

Alan

Expert:  TonyTax replied 1 year ago.

It would appear that you anticipate a net non-exempt gain due to conversion of £90,000 (£500,000 - £370,000 - £40,000). This gain has to be split between the two new properties in proportion to their respective values so the non-exempt gain attributable to the property worth £270,000 will be £48,600 and the non-exempt gain attributable to the property worth £230,000 will be £41,400.

The taxable parts of the gains will arise as and when each property is sold, not when the second one is sold. Therefore, the £41,400 gain will arise as soon as the lower value property is sold. The first 11,100 of gains an individual makes in a tax year are exempt so that would leave a net taxable gain of £30,300. The non-exempt gain on the higher value property will arise when that property is sold, if ever.

There are two rates of CGT, 18% and 28%. The rate or combination of rates that you will pay will be dependent on the level of your income in the tax year that the property is sold. Assuming that is in 2015/16, one of the following scenarios will apply:

1 If the sum of your income and the net taxable gain in 2015/16 is £42,385 or less, then all the taxable gain will be charged to CGT at 18%.

2 If your income alone in 2015/16 is £42,385 or more in 2015/16, then all the taxable gain will be charged to CGT at 28%.

3 If your income alone in 2015/16 is less than £42,385 but greater than £42,385 when the net taxable gain is added, then part of the net taxable gain will be charged to CGT at 18% and part at 28%.

A CGT liability isn't quantifed until a property is sold and reported to HMRC. It doesn't have to be paid until 31 January following the end of the tax year in which the property is sold.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15840
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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