Capital Gains PPR and allocation of costs

Capital Gains PPR and allocation of costs

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Hello, your help will be appreciated, scenario as follows:

10 years ago block of 3 flats purchased for £300,000. Now worth £150,000 each and disposal of one or more being considered.

However my question really relates to the cellar which is now being converted into a flat - a 4th flat.

Conversion will cost approx. £70,000 and the landlord will move in, live there for at least 12 months. It will be his PPR but he will probably sell in near'ish future.

My question is when he sells his 4th flat, his PPR, will he need to apportion some of the original £300,000 cost of the building or just the cost of the conversion?

So which is the correct calc?

Sale of flat 4, say £140,000

Less: Cost (conversion only) £70,000 vs Cost of conversion £70,000 + Share of the cost of building (say 1/4) £75,000

Profit on which to claim PPR £70,000 vs Loss of £5,000

Suffice to say we'd prefer to retain the cost of the building against future taxable disposals.

However, if we do need to apportion some of its costs then on what basis? The cellar wasn't worth the same as the three existing flats when the property was purchased - assigning 1/4 of the original £300,000 cost to the cellar would seem overly generous to the tax man.

Replies (16)

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By Marion Hayes
28th Jan 2015 11:52

Order of events


If one is sold then first you establish the costs of the whole, as the building was purchased as a whole.

Incorporate any enhancement costs.

The you have a part disposal - not a quarter but the proportion of the value of the part sold as opposed to the value of the whole on the day of sale. I actually find it hard to believe that the basement flat would be worth as much as the ground floor flat with garden say.

 That is the proportion of the total acquisition costs to use in your calculation.

Having established the gain you then look to any available reliefs such as PPR which is a whole other debate.

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By Montrose
28th Jan 2015 11:53

PPR allocation

 I would suggest somewhere between nil and £150,000 in respect of the unconverted cost  be brought into comp. together with conversion costs.

A few facts might help.

1] Was planning consent needed for the conversion?

2] When building was purchased, was any value attributable to the cellar ?

3] Any community charge payable in respect of the cellar prior to the conversion?

4] When new flat created, what will be sold in due course-a long lease? What service charges, etc will basement flat have to bear after sale?

 

Given that this is property valuation question, be prepared for a reference to the DV.

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paddle steamer
By DJKL
28th Jan 2015 12:14

Like comedy, timing may change figures

 

When the first flat sale is made it will be the costs pertaining  to that flat that reduce the carrying cost of the remainder, the formula explained above.  e.g. at present say the values are:

Flat 1 £150, base cost £93.75

Flat 2  £150, base cost £93.75

Flat 3 £150 base cost £93.75

Base £30 base cost £18.75

Total £480 base cost total £300

 

If the works on the basement are done before first sale, the base cost is then £370

If say the basement is then worth say £120, you have

Flat 1 £150, base cost £97.37

Flat 2 £150, base cost £97.37

Flat 3 £150, base cost £97.37

Base £120, base £77.89

Total £570, base total £370

The order the sales/works are done in order to optimise base costs re flats 1-3 will therefore be a function of the ratio of the sum of the part valuations and the total cost to be allocated across the parts. The key to reviewing properly is knowing what the basement will be valued at post conversion and what it is worth now.

 

 

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By chewmac
28th Jan 2015 13:21

Thanks, but

Hello, really helpful and thought out comments, thanks but it seems to me that (no offence meant):

MONTROSE suggests a common sense valuation (i.e. one the landlord would better understand), because yes, planning has recently been sought and gained - in the real world the basement was worth close to £nil when the property was purchased.

whereas DJLK suggests apportionment of costs based on sales values when each property is sold.

Regardless of which is most fair, which is HMRC acceptable?

It's quite likely that the basement flat will be the only one he sells in the near future.

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Replying to Elgin:
paddle steamer
By DJKL
28th Jan 2015 14:16

Surely apportion A over A+B

chewmac wrote:

Hello, really helpful and thought out comments, thanks but it seems to me that (no offence meant):

MONTROSE suggests a common sense valuation (i.e. one the landlord would better understand), because yes, planning has recently been sought and gained - in the real world the basement was worth close to £nil when the property was purchased.

whereas DJLK suggests apportionment of costs based on sales values when each property is sold.

Regardless of which is most fair, which is HMRC acceptable?

It's quite likely that the basement flat will be the only one he sells in the near future.

Look at CG12731

http://www.hmrc.gov.uk/manuals/CGmanual/CG12731.htm

Surely the key is what value ascribes to the parts through the sales process, I somewhat simplistically,  to illustrate, used somewhat set in stone figures, but HMRC guidance I think would indicate you would look at the valuation of the part sold (A) over the valuation of the part sold(A) plus the valuation of the part remaining (B) at each point in time when a sale occurs. Whilst it is assumed the sales will be fairly close in time this may not be the case and intervening capital expenditure will keep changing the residual cost that needs apportioned.

The cost to be apportioned is of course the total cost at each point in time less that used for previous disposals. The valuation of the basement is a function of what it is/its planning status/ what works have been done at the point of any sale. I somewhat simplistically used for illustration a starting £30,000 plus £70,000 works, plus £20,000 developer margin on the net £100,000 cost, (a reverse desktop valuation.)

Obviously if no hope value/ planning applied for at point of first sale the basement value will be low, if planning applied but works not done you would surely value at end sale price likely to be achieved once complete, less works costs to complete less profit margin which is probably circa 20-25%

What I was probably in a clumsy manner trying to say is the calculations will depend on the timing of the future events you foresee happening e.g. if all flats sold before the £70,000 cost incurred on the basement then only the £300,000 cost apportions  re these and when the basement eventually gets sold its base cost is whatever residual remains of the £300,000  ascribed to the undeveloped and possibly lacking planning permission basement plus the £70,000 that later gets spent.

 

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Portia profile image
By Portia Nina Levin
25th Apr 2015 18:08

(No subject)

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By Montrose
29th Jan 2015 12:29

What asset?

Portia and others assume that A/A+B will apply, but there is another scenario .

Client presumably owns freehold. Suppose he first creates a long lease of the basement, and then expends money on conversion., retaining entire freehold- does A/A+B apply?

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Replying to Joe Alderson:
By chewmac
29th Jan 2015 19:00

Freehold

Montrose wrote:

Portia and others assume that A/A+B will apply, but there is another scenario .

Client presumably owns freehold. Suppose he first creates a long lease of the basement, and then expends money on conversion., retaining entire freehold- does A/A+B apply?

If anyone's still interest the client holds the freehold for the building. He plans to first sell the existing flat 3 on a long leasehold and then move into the newly built flat 4 and again later sell on a long leasehold.

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By chewmac
29th Jan 2015 14:08

A very helpful thread

All very helpful and I hope this thread can be of some help to others in the future.

DJKL the reference to CG12731 really helped; Portia - thanks for emphasising the point in your own unique way.

MONSTROSE raises an interesting Q. Let's see if anyone picks up on that.

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Portia profile image
By Portia Nina Levin
25th Apr 2015 18:08

(No subject)

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Portia profile image
By Portia Nina Levin
25th Apr 2015 18:09

(No subject)

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By chewmac
30th Jan 2015 14:46

Results are...

Thanks for all the advice so far. It's helped a lot. If anyone has chance to check these results and clarify my final doubt that would be great:

As background: Flat 3 will be sold first, then later flat 4 (basement) which will be a PPR.

Costs to date: £210,000 (£140,000 for building + £70,000 conversion of flat 4)

Disposal value "A" = £170,000 sale price of flat 3

Value of part retained "B" = £490,000 (£170,000 x 2 (re flat 1 and 2) + £150,000 for near completed flat 4)

Scenario 1
£210,000 x (£170,000 / (£170,000 + £490,000)) = £54,090 to allocate to flat 3.

Scenario 2
Revised because CG12731 reads to me that expenditure wholly attributable to the part which remains undisposed of is excluded.

I presume this means that in addition to the £70,000 cost I'd also exclude the disposal value of flat 4. Hence calc as follows:

£140,000 x (£170,000 / (£170,000 + £340,000)) = £46,667

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By Marion Hayes
31st Jan 2015 13:01

Disagree

I can see the £70k being excluded from apportionment of costs as it is a distinct item. I do not agree that the value of flat  can be excluded from the value of the whole.

Also, I would not be so confident of either CGT status nor achieving PPR I am assuming the planning applications could be taken to show intent as the sale will be relatively close to that of Flat 3 - where does he live at the moment?

 

p.s. Sorry Portia - sort of thought part disposal automatically meant A/A+B but should have been specific

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By chewmac
31st Jan 2015 20:00

Lives in flat 3 at the moment
Yes, I see what youre saying about intent but really I'm just trying to settle at this stage exactly how the call works. Are both the £70k cost and flat 4 sale value excluded? I can't find another example. Thanks

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By Marion Hayes
31st Jan 2015 20:58

Only the cost

In identifying the costs for each sale you exclude the 70 - it doesn't need apportioning as it wasn't shared by all the flats in the same way the acquisition was.

You do not exclude any of the flats present at the time of sale in the apportionment calculation.

Flat 3 sale comes first so you use flat3 sale value / value of all 4 at that point in time to calculate how much cost is included in the first gain.

e.g. 170  /  (170 + 490)  x  300,000  - cost used 77,272

When you sell flat 4

  150 / ( 150+ 170+170)  x  222728  is 68,181 plus 70k conversion cost is your total cost.

flats 1 & 2 have £154,545 base cost remaining.

  

 

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Replying to SJH-ADVDIPMA:
By chewmac
31st Jan 2015 22:19

The end
Thanks, that's really helpful. You've clarified my last doubt. I think that closes the issue. Thanks all

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