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PPR Relief when developing a garden plot

Main house sold and garden plot retained. Owners deciding whether to sell or develop themselves

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Good morning all. 

I spent some time this weekend reviewing a situation for some family friends who wanted some advice. Let me state at the outset that I have given them an overview of the issues only and explained that they must seek advice from a property specialist who will be better placed to advise them as their situation is more complicated than it first appears. 

Having said that, I wanted to post the details here also as the situation was an interesting one which intrigued me. See below an overview of the scenario.

H&W couple bought their home in October 2006 for £600k and lived it as their PPR for the entire period of ownership. In August 2016 they obtained planning permission to build a house in their garden, though no work was started and the garden remained part of their home and used as a garden. The area of the house and garden is below the permitted size for PPR. 

In Jan 2017 they sold the main house for £875k and moved into rented accomodation, but retained the garden plot with the intention of buildng the house on the plot to live in. They advise that the garden plot was valued at £300k by their estate agent at that time.

For personal reasons they postponed the build of the house and have only recently got builders in place to start the build in May 2019. They expect to move to the plot in a caravan for 3 months when their current rental agreement ends in February 2020 before moving in to the new home in May 2020. 

In the meantime they have recently been approached by a developer to buy the plot for £320k. This is when they approached me and asked what they need to consider if they a) sold the building plot to the developer, b) built the house themselves and immediately sold it or c) built the house and lived in it as was their original intention. 

On the face of it this is a normal situation often discussed, but there are a number of quirks which I think make it more tricky. In each scenario the complications I came accross were:

Scenario A - This is the most straight forward, but still has some grey areas for me. Unfortunately for the H&W, as they sold their house in Jan 2017 and retained the land, I believe PPR has been lost on the retained land such that CGT will be chargeable. The 'cost' of the retained land will be calculated by reference to A / (A+B) x Cost where A is the value of the retained land in Jan 2017 and B is the value house sold in Jan 2017. Although the retained land is an empty building plot with no work having begun, it would still be classed as 'Residential' for CGT and incur the 18%/28% rates as, during their ownership, it has been a residential garden. Selling fees would be an allowable deduction. Would anyone disagree with the conclusions above? An extra query I was pondering over was whether the planning costs were allowable as a deduction given that they were incurred prior to Jan 2017 and effectively pushed up the value of 'A' in the equation, meaning a greater portion of the cost of the original house was allocated to 'A' than would otherwise have been the case. It didn't seem right to me to then claim these costs again as a deduction?

Scenario B - In this option the H&W would build and sell the property and make a profit. They estimate build costs to be £400k an sale value to be £900k. This is clearly a trading profit and would be taxed as such on income. However one area I was unsure of would be whether the the treatment would be split, being treat as a Capital Gain at a MV of £300k up to the point they decided to do the build (and the land effectively changes from Capital to Stock) and taxed as per scenario A on the first slice of the value uplift, and then as trading income with of £200k being the sale price of £900k less build costs of £400k and the new base cost of £300k? NICs would also be due on the income. 

Scenario C - This scenario is made more complicated again by the fact they did not start prior to selling the original house, and also because they have left it 3 years and 4 months before starting any work. If they move on to the site in March 2020 in their caravan before moving in to the house in May 2020 I believe the perod of occupation as PPR would start in March 2020 (so long as they genuinely intend the new house to be their PPR for the forseeable future). I dont believe the PPR period can start any earlier using ESC D49 due to the delay in beginning construction. If the H&W decide to sell the house in 5 years after occupying it, the gain would need to be apportioned between the period as PPR (5 years) and the period not as PPR. I believe the period not as PPR would be 3 years & 2 months from Jan 2017 to Mar 2020. The gain would be calculated using the sale price minus the base cost of A / (A+B) x cost again and also after deducting the costs of construction. I have two nagging doubts however from cases I have read but cannot remember where. The first is that I am sure there has been a case where the period of ownership not covered by PPR could actually be deemed to have begun when the initial house was purchased in Oct 2006 (bad for the H&W). The other thing I am sure I have read is that instead of a straight time apportionment of the gain, it is possible to weight the gain in to the period as PPR when construction take place if they actually move into the caravan earlier. 

 

If you are still reading down this far thank you very much for your time, I realise this is quite a long series of questions! As I have stated, I have already told the H&W that this is beyond my expertise and to seek advice of a specialist experienced in this area, discussng the issues I have raised with them. However I would love to know whether my general understanding is wide of the mark or not? 

Many thanks. 

 

WA. 

 

 

Replies (3)

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By Martin B
18th Mar 2019 12:25

Sold main residence in Jan 17. No PPR now due for the garden plot.
May have got PPR had they developed and sold before selling main residence. Income tax applicable if developed and CGT if sold.

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Replying to Martin B:
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By Weald Accountant
18th Mar 2019 13:09

Hi Martin, thanks for responding. That is broadly in line with what I have stated above, but what are your thoughts regarding the Planning Costs in A)? Or whether the treat the whole gain at Trading Profit in B) or split it between CGT for the first period of ownership and Trading Profit for the latter? And finally what do you think would be deemed the periods which PPR does/does not apply in C) and the apportionment of the gain into each period?
Many thanks.
WA.

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By michaelblake
19th Mar 2019 17:58

A The planning costs should be claimed as a deduction in the calculation of the gain arising on the part retained (the garden) and not the gain on the part disposed of (the house) since the enhancement in value achieved by the expenditure relates to the part retained and not the part disposed of. B and C There is a notional CGT disposal at market value when the development starts (TCGA 1992 s161) unless an election is made under TCGA s161(3) . The period of ownership will start when the house and garden were acquired and the gain is calculated in a straight line basis from that date (Henke v Henke) There is no period for which the gain can qualify for PPR if the garden is sold after the house is sold - see Varty v Lynes and the HMRC guidance at CG64337. C There is a case in my view for arguing that PPR should start from the period that they occupy the caravan as a main residence providing that they have no other residence at the time they occupy the caravan and the occupation has the quality of permanent residence which it should have if they go on to occupy the house as their only or main residence for a period of years. As in reply to B the period of ownership of the garden starts when they first acquired the house and garden (Henke v Henke); the gain is calculated on a straight line basis, and there is no period prior to the occupation of the caravan that would qualify for PPR (Vartey v Lynes)

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