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Principal Private Residence Relief

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An individual is considering selling his main residence. 
The purchaser will demolish the property and build 4 apartments on the land. 
In exchange for his main residence the individual will receive 2 of the apartments. One which he will then occupy as he main residence and the other which he can then sell. 
On the face of it there would appear to be a restriction on the availability of PPR relief relating to the apartment to be sold and I should grateful for any thoughts. 
If this is the case then what would be the base cost of the apartment?  
 

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By Paul Crowley
07th Apr 2021 15:16

He sells for the value of 2 Flats
Base value if he sells will be the value of the completed flat being sold

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By The Dullard
07th Apr 2021 15:59

Paul's suggestion relies on the proposition that the clients whole interest in the land is being disposed of with the consideration being another different interest in the land. Sargaison v Roberts 45 TC 612 says that proposition is fallacious.

It says that the client is retaining an interest in the land (two flats) and only disposing of the interest not being retained. The only way to arrive at a figure for that is to consider it to be the disposal of the whole of the value of the land (at current value), plus a chose in action for the building of the flats (which would be valued at the estimated build costs). The market value of the completed flats overstates the purchaser's consideration.

In relation to the flat to be sold, there is arguably an appropriation to trading stock (of a right to a completed flat, which is costing a pro-rata share (between the two retained interests) of the current market value of the land, and the value of the chose in action for that flat (estimated build costs). There will be a trading profit when it is sold.

The CGT base cost of the flat retained is what is left after A/(A+B)ing those two calculations (both gains qualifying for OMR currently), plus the value of the chose in action (estimated build costs) for the retained flat.

Henke then applies on any subsequent disposal of the retained flat.

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Replying to The Dullard:
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By Paul Crowley
08th Apr 2021 09:16

Are there any distinguishing features?
It was an argument about income tax and HMRC looking to take away tax relief from the farmer on buildings that were in existence and that he was still using after the 10 minute transaction.

Farmer gave the land to his trust and trust gave him a lease

A man with Binoculars watching during the whole transaction would see a farmer working the land and straight after the same farmer working the same land
Nothing visible
The trust was a related party

This issue would look different. Man with Binos would need to be there for a very long time and see a real change.

Tax judge person created a result that was fair to the farmer.

That was 1969 when CGT was the new kid on the block.

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Replying to Paul Crowley:
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By The Dullard
08th Apr 2021 20:20

HMRC think it applies for CGT purposes. See CG70774. A sale and leaseback is exactly what will happen.

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By Paul Crowley
08th Apr 2021 09:12

Well if that really is the law then easily avoided but just fixing a price
Seller sells for for the price. Seller then buys the yet to be built flats for same price.

However based on above this could be seen as a tax avoidance scheme.
So look for HMRC clearance

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Replying to Paul Crowley:
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By Tax Dragon
08th Apr 2021 18:11

Paul Crowley wrote:

Well if that really is the law then easily avoided.

I never trust those "easily"s. Even less so when the precede "avoided"; less so again when the context is "the law".

Could easily (see what I did there?) make things worse - e.g. buyer won't want to pay the SDLT. 'Sides which, you'd want to bind them to the deal, which means it's not just cash consideration.

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