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Sam, Accountant
Category: Tax
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My mother sold her house in March 2014 following the death

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My mother sold her house in March 2014 following the death if my father last year. The house had 2 holiday lets with it:
- a flat attached to main house which made up part of the main house for at least of 6 months of the year (my parents let it from Easter to sept most years, sometimes less)
- cottage in the garden
The flat was built as an extension shortly after my parents bought the property in 1996. My father drew the plans and did all the internal work whilst a professional contractor built the 'shell'
The cottage existed in another form when my parents arrived and in around 2000 it was knocked down and rebuilt to a higher specification. Again my father drew the plans and did all the internal work whilst a professional contractor built the 'shell'.
I live overseas and have for toe decades so am not familiar with uk tax law. Hence when the house was valued and put on the market earlier in the year I asked the agent whether CGT would be payable - the answer was no. Our conveyancing solicitor has not mentioned it either (he is very familiar with the property having been the involved for both the purchase in 1996 and the sale last March).
My mother's accountant has just told us that CGT will be payable on the holiday lets. We are surprised by this would like to understand why, and indeed if, this is the case. The holiday lets could NOT be sold separately. The deeds clearly state they are part of the main house. In addition they were only ever rented out for less than half a year and for the remainder of the time, to all intents and purposes, made up part of the main house.
I would be very greateful if you could provide some insight and if we do owe CGT how will it be calculated? We do not hold any record of the build costs for either the flat or the cottage.
Thanks for your question
I am sorry to say there will be capital gains due on both the cottage and the holiday let flat.
For the cottage - this is due to the fact this was never the main residence, so was always going to give rise to a capital gain, and you do not indicate whether this was let as a holiday home - if so then if it was fully furnished and met the holiday let remit, then it maybe that the capital gain can be charged under entrepreneurs relief - which just charges the gain at 10%
The remit for this lower rate of capital gains, require the furnished holiday let to be
1 The availability condition (availability test/threshold) – during the period
(normally the tax year – see page 4 of this helpsheet), the accommodation
is available for commercial letting as holiday accommodation to the public
for at least 210 days (140 days for 2011–12 and earlier).
2 The letting condition (occupancy test/threshold) – during the period
(see page 4), the accommodation is commercially let as holiday
accommodation to the public for at least 105 days (70 days for 2011–12
and earlier).
3 The pattern of occupation condition – the accommodation must not
be let for periods of longer-term occupation (see page 4) for more than 155 days during the year.
All this is shown on the Helpsheet 253 a link here for this
I also assume all the rental income was declared to HMRC.
The gain will be - the value attributable to the sale of the cottage less the building costs, and whilst you state there are no records of the costs to build, will create a problem, as this is vital information to establish the true gain, IT may be that you need to try and track down through old bank statements or contacting the builder, to see if you can recreate the costs, or whether this cottage was registered with the land registry completing the full build.
This forms the initial gain from which the costs to sell can be deducted - then the amount left over will have the first £10,900 exempt (as this is the annual exemption allowance for 2013/2014) and then the remaining gain charged at either
1) 10% if entrepreneurs relief is due
2) 18% or 28% - this is determined by your mother usual rate of annual income
Now onto the flat - whilst this was attached to the main house - a proportion of the value of the house sale, will need to be considered for capital gains, as its use for 6 months of every year was not as use as the private residence, the gain will be worked out the same as indicated for the cottage -
But this will need also the value attributable to the sale amount, that was attributable to the flat.
And again you will need to establish the costs of the extension being built.
Also note that there is only one annual exemption allowance per tax year (just one £10,900 exempt for 2013/2014)
I would also advise that you should have some recourse against both the agent (who should not have advised anything and should have directed your mother towards an accountant) and the conveyance - who should know better, and he wasn't sure, should also have directed your mother to an accountant (or HMRC)
You will need to contact HMRC to advise the position, and see what can be gathered in terms of the costs to build, failing that - you would need to at least have a value established at the time the build were complete, so you have at least a figure to work with as the acquisition/original cost.
Local estate agents can provide old valuations, as can the distract valuation office.
I have added a link for the district valuation office
Let me know if you have any follow up questions
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