Capital losses on property

Capital losses on property

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A father and son buy a neighbouring property (house and garden) for £600k and then sell the house for £400k. How would the Inland Revenue viewed this for capital loss purposes? Presumably they wouldn't accept a £200k loss? If not, how do they apportion the original £600k between the house and garden to determine the loss (if any) when the house is sold? (The garden has clear development potential, particularly when consolidated with the father's neighbouring property.) Also, if - after a pit of refurbishment - the house, without its garden, was sold for more than £600k plus refurb costs, how would the Inland Revenue calculate the gain on the house and the base value of the retained garden?
Thanks for your guidance.
Mike Price

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By AnonymousUser
29th Jun 2005 12:42

I doubt if CGT applies ...
... because these look to me like trading transactions, though you would probably work out the profit on sale of the house in the same way as you would if it were liable to CGT i.e. applying the part disposal formula. From the query it seems that the clear intention is to make a profit on sale, possibly by further development (which would certainly be trading). The time scale may be a factor i.e. if the house is sold and the remaining land retained for a few years before development then the sale of the house may be treated as a CGT disposal. However, the sole intention of buying the garden seems to be to make a profit on disposal. In Taylor v Good the taxpayer bought a house which it was subsequently decided was too big for him and his wife's occupation and it was sold with planning permission to a developer at a substantial profit. The Revenue argued that this was trading, it seems mainly because the taxpayer had applied for planning permission to enhance the value. The court held that the sale was not a trade receipt because there was no intention of selling for profit when the property was acquired and merely taking steps in order to get the best price did not bring the transaction within the definition of trading. However, if the taxapayer's intentions had been a bit 'iffy' it might have gone the other way. Here the intention is admitted to be to make a profit on sale and therefore seems an open and shut case to me. In a situation where property is actually developed before sale that is clearly a trade of property development.

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By peter.blatch
27th Jun 2005 14:31

This is a part disposal.
The cost is apportioned using the A/A+B formula. Where:
A = the value of the part disposed of(i.e. what it was sold for)
B = the value of the part retained at the time of the disposal.

So if the garden is worth £200K at the time the house is sold, two thirds of the cost is apportioned to the house and therefore there is no loss. You will need to obtian a value for the garden from a Valuer to compute any gain or loss.

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