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S224(3) restriction on PPR claim

A client converted his PPR into 3 flats. He has subsequently sold one of the flats (after having lived in it for 12 months) and I am calculating the CGT position.

He lived in the (unconverted) house for 12 years, then lived in the flat that has been sold for 1 year (2008-09).  The last 36 months may also be claimed.

I can see from HMRC website that you have to restrict the amount of PPR relief you can claim, however it indicates that you need to compare the restricted gain to the gain arising on the flat.

1) I am assuming an A/A+B calculation is needed to calculate the 'normal' gain - is this correct?

2) What PPR can I claim?  Can I include the period living in the house or is it just the period it was a flat?

Any thoughts or comments on this would be appreciated.

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There are potentially two disposals to consider

But what were his intentions when the conversion commenced? Did he always intend to live in one of the flats? Where did he live while the conversion took place? Why did he only live in the flat for a year? Is he a builder?

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By rachelb
02nd Apr 2014 09:59

He initially moved out while the conversion work started.  He then moved into the first flat that was finished, before moving into the flat that he actually wanted to live in long term (and where he currently resides).

He's not a builder (well into retirement) and his initial intentions were to potentially sell one or two of the flats, or to let them out.  In other words he was unsure what he was going to do.  He currently has no intention to sell the flat he is in and the other flat is not on the market for sale.

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I see

Let's call the flats 1, 2 and 3. 1 is the one that he now lives in, 2 is the one that he lived in for a year and then sold, and 3 is the one that he still owns but doesn't live in. I assume that 3 is rented?

There's an argument that he was trading to the extent that he intended to sell the flats. It's also arguable that since flat 2 was only temporary accommodation while flat 1 was being finished.

The second argument seems a bit harsh though since he occupied the whole house as his PPR beforehand and then flat 2 was only really a proxy for flat 1.

So, assuming that it's not considered to be trading and the year of occupation of flat 2 is considered to be occupation as the main residence (which will mean that flat 1 wasn't for that year, but you will have occupation before and after, so it's deemed occupied), the calculation is as per CG65271, save for the fact that you've got 3 flats instead of two.

There's actually an error in CG65271, in that the gain on the flat sold in the example should only be £85,000 before apportionment (ie £135,000 proceeds less £50,000, being half of the base cost - HMRC have used the sale proceeds figure). So the apportioned chargeable gain should be £85K x £50K/£300K = £14,167.

If all the numbers were the same (base cost, valuations, sale proceeds) other than the fact that there are now 3 flats rather than 2. You'd have a gain before the s 224(3) restriction of £101,667 (ie £135,000 base cost less £33,333, being one-third of the base cost. That would be apportioned £101,667 x £50K/£300K = £16,945 chargeable gain.

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By rachelb
10th Apr 2014 11:27

Thanks for your help Steve.

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