A client of mine has converted his private residence into 2 flats before selling the lot. I had a look at the Inland Revenue CGT manual and it points to evidence that full PPR relief MAY not be available. I reproduce below the relevant sections.
CG64306: A group of flats may be considered to be a single dwelling house if they are all occupied by the owner or his family within the same block and contiguous.
CG64308: If the flats are in the same block but are on different floors relief should only be allowed in exceptional circumstances.
CG64309: There are buildings whhich to outward appearance are a single dwelling house but which are in fact split up into self-contained units. Each self-contained unit is itself a dwelling house.
Does anyone know the tax position on this?
Khushal K. Napal
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Hi Khushal
What the manual is saying is that if you apply for planning permission before selling a property but do nothing else they do not consider that that represents enhancement expenditure, but if you do improve the property then it does become part of the allowable costs.
Concerning value the answer is by engaging the services of a property valuer - many estate agents will do this as a sideline, some specialise, and if the revenue don't accept it then prepare to enter into negotiations with the revenue's Land Valuation Office, or rather your specialist valuer will do it for you - this is, tragically, not an allowable expense.
Will S 224(3) work?
Many thanks Paul and Daren for your brilliant comments. Very revealing indeed!
IR says: In deciding whether a restriction to relief is appropriate under the second part of Section 224(3) ignore cases in which the only relevant expenditure is incurred on
• obtaining planning permission, or
• removing restrictive covenants.
But I would have thought that to convert a house into self-contained flats, planning permission is required anyway.
Also, does anyone know how to ascertain the market value of a dwelling house, before conversion into flats, to satisfy the requirements of S 224(3)TCGA 1992?
Expenditure designed to creat a gain
The act of converting the property into two flats is incurring expenditure designed to create a gain and so that part of the gain will be chargeable - it will NOT qualify for the last three years of ownership etc as s224 will bring it into charge before any other exemption is deducted.
From examples in the revenue manual it will be necessary to determine the unimproved value of the property at the date of sale and as both flats have been sold compare this with the total sa;e proceeds - this gives the total gross gain attributable to the improvement expenditure. From this you deduct the cost of the improvements/conversion and the remainder is the chargeable gain. This will qualify for taper relief over the WHOLE PERIOD of ownership of course, but at the non-business asset rate.
Continuing this...
I have a client who has owned his PPR property for 25 years.
Last year he converted the house into 2 flats and let them out for one year.
He is now selling the building as one, and not as 2 flats. The reason being is because both flats are in bad condition and it is easier to sell as a whole.
The flats currently have council tax each so it is recognised as two flats.
What am i missing here? Surely it should be sold as two flats? Unless he re-converts it back into a home...
I could do with some assistance on this one if possible.
Thanks,
Matt