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Three storeys town houses in the exclusive Bloomsbury area in Central London.
istock_Townhouses_Nicola Ferrari

Property tax: Converting a home into flats


Reshma Johar examines what tax relief may be available where the owners divide their main home into two separate flats, and later sell the properties.

10th Nov 2020
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A couple, who are in a civil partnership, own a residential townhouse with four floors. After several years, they decided that the property was too big for them and so undertook renovations to create two separate flats. The property was converted so that the couple could live independently to their tenants. Both flats have their own access via a shared front door. 

Use and occupation of the property

A timeline would help establish the use and occupation of the property, including intention both pre and post-split to two flats. It would also be beneficial to understand the floorspace of the property.

Periods to consider both pre and post renovation:

  • The original intention of the purchase.
  • How the floor space of the property has been used and occupied.
  • Which rooms, areas or floors have been let to a tenant.
  • For each period of use or occupation consider the percentage floor space used.

Principle Private Residence Relief (PRR)

PRR will eliminate a gain or loss from CGT where a property qualifies for the full periods of ownership. Periods of actual occupation and deemed occupation will need to be established to determine the use of the only or main residence. Consider how the final nine months of ownership covered by PRR would apply for the two renovated dwellings.

The PRR would need to be adjusted on a ‘just and reasonable’ basis if there is a change in what is occupied as the couples’ residence because of either reconstruction or conversion of the building, or a change in use of part of the property for example for a trade, business or profession.

An adjustment to the relief would be required if the property is acquired wholly or partly for the purpose of realising a gain from its disposal, or where there is subsequent expenditure on the property wholly or partly for the purpose of realising a gain from its disposal. The renovation of the property is likely to affect how much PRR the couple would be entitled to.

For the period before renovation, if there was a tenant and the lodger lived as part of a family, sharing the living accommodation and taking meals with the owners, then lettings relief can be ignored as full PRR could be claimed instead (see statement of practice SP14/80).

Method if both flats are sold

The HMRC CG manual at para 65265 suggests an apportionment of the gain first needs to be applied to split out what would be covered by PRR and lettings relief, and what part of the gain would not be entitled to the relief. This method would ensure that relief could be applied to each flat which formed part of the couples’ undivided property, pre renovation.

The part of the gain not qualifying for reliefs would need to take into account the value of the unconverted market value of the property as well as the capital expenditure linked to the renovation costs. The renovation costs could be adjusted if it is considered that the entire property benefited from the enhancement. The part of the gain entitled to the reliefs would need to consider use and occupation of the property (both pre and post renovation).

Method if the flats are sold separately

As with the above approach, the HMRC manual suggests it would be necessary to obtain details of what the unconverted market value of the property would have been, and capital expenditure linked to the renovation costs. The starting position would then be to apportion the gain to establish what part would benefit from the relief and what part would not. A further computation would be required when the remaining flat is sold and again, part of the gain may be apportioned to exclude amounts not covered by the reliefs.

It is likely that the value of the sold flat may have partly been derived from the whole property, where in this case the main residence has been split into two flats or where rights or interest over the flat was created. In this case it would be necessary to apportion the allowable expenditure incurred on the two flats, which as with PRR would need to be made on a just and reasonable basis.


When it comes to the disposal of a residential property, tax advisers need to make sensible decisions on apportionments of which parts of a gain can be covered by available reliefs. The apportionments, which need to be made on a just and reasonable basis, may need to consider intention, use, occupation, floor space, and renovations.

In the situations mentioned above, if the disposals are made after 5 April 2020, lettings relief would not be available post renovations, as the owners of the property will not be in shared occupancy with a tenant in a single dwelling.

Before the couple go ahead with any change of ownership, it would be important to obtain professional values for the whole property, including the hypothetical unconverted value as well as for each separate residential property.

The couple should seek legal advice if they want to separate the flats within the freehold and create leases. This would also have a CGT impact that would also need to be considered.

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