Should a property that was initially a main residence be converted into flats and sold, PPR will be denied in respect of the gain attributable to the period of ownership whilst the conversion is taking place as the expenditure has been incurred wholly or partly for the purposes of realising a gain.
A valuation of the property as not converted is required and then compared with the sale price post conversion in order to establish the additional profit attributable to the conversion.
Tony lived in a property as his main residence from the date of purchase in July 1996 (cost = £100,000) to July 2011 when work commenced on conversion into three flats. Work was completed in December 2011, the flats finally all being sold in June 2012 for £250,000 each.
The conversion cost was £150,000. If the property had remained as one house the sale proceeds would have been £550,000.
The additional expenditure for conversion generated an additional gain of £50,000 calculated as follows:
|Total Gain||Exempt||PPR Gain||Taxable Gain|
|Original cost of property||£(100,000)||£(100,000)|