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I have a property I have lived in for the last 10 years and…

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I have a property I...
I have a property I have lived in for the last 10 years and I am looking to divide into 2. I have planning application just approved, and wish to know whether CGT will apply to the newly created property. In reality I will likely sell both properties immediately the conversion is complete.
I understand the second property would not be my domiciled residence and therefore liable to capital gains tax, but how could a value be assessed? Surely the day the division is created the second property attains a value. I am assuming if this is sold immediately there has been no growth to charge CGT on. Whereas if I kept it for 10 years, there would be. Or will they levy a charge based on the value of the property as is, and the gain made by splitting?
Thanks in advance. Its a tricky one.
Submitted: 8 years ago.Category: UK Tax
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6/21/2010
UK Tax Professional: Sam, Accountant replied 8 years ago
Sam
Sam, Accountant
Category: UK Tax
Satisfied Customers: 14,354
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Capital Gains, CIS ask for Sam Tax
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Hi JACUSTOMER


Thanks for your question

The gain is worked out by using the total sale price of the two flats less the uncovered value - so you would need to obtain a valuation of the property prior to conversion - from this gain would then be allowed the costs to convert and this would form your initial gain
For example

Sale proceeds 200,000
lessunconverted value July 1988150,000
50,000
lessconversion costs20,000
30,000

Gain

30,000

In this example the gain is £30,000 from which there is also an annual exemption allowance - which currently stands at £10,100

So after the £10,100 has been deducted - any gain is liable to tax, which sits at 18% at this time - but is subject to change

Thanks

Sam
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Customer reply replied 8 years ago
Is that a final 100% answer in all circumstances?

I had read many conflicting threads elsewhere with varied opinions since asking this question. The general concencus was that as I had lived here so long and technically been resident in both halves of the property for the last 10-11 years it would likely be exempt or slip under the radar. Another indidvidual was advised he may be exempt even if he had just bought a property with the intentions of making such a conversation as there is no clear cut rule on this, but that the IR could levy a CGT charge for the short time involved and the deliberate intention to make profit from the purchase and subsequent conversion.

Assuming your assessment is correct can you confirm the following.
1) who makes the current pre converted value? (estate agent val accepted)
2) should I therefore keep every receipt etc to offset as much as poss in construction costs
3) the final figure that is then reached is less the current CGT exemption of £10,100. Is this also added to earnings for the year? i.e. if I have no income in 2010/2011 will my personal tax free limit be subtracted too?
UK Tax Professional: Sam, Accountant replied 8 years ago
Hi

Yes - this is how HMRC treat any one property that has been divided into two - when the one property has been up to the point of the conversion your main residence.

Sadly it will not slip under the radar - unless you have made a gain that is less than the annual exemption allowance of £10,100, as you are more than likely to make a profit on this conversion - therefore a liability arises. (but as you can see only on the difference of the pre conversion and post conversion profit) then conversion costs are allowable - and an annual exemption allowance.

In answer to you follow up questions
1) I would get an independent valuation (pre conversion) and the valuation office is a good example of where to go - see link here - as estate agents are a guided price and not deemed to be accurate valuations - many of the
2) Yes keep every receipt attributable to the conversion costs - so you have an accurate expenditure attributable to the conversion
3) Capital gains tax is a separate entity - and is likely to remain so - so personal allowances(even when unused) are never allowable to reduce the capital gain.

Thanks

Sam
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Customer reply replied 8 years ago
Grr!!

That's directed at HMRC, not at you! My realistic aim is to try and achieve as high a valuation as possible right now, and as large a sum of conversion costs. I'm thinking that my best bet is to obtain 3 estate agent generous valuations for now, as I doubt an independent valuation will work in my favour.

My big concern is that I am carrying out much of the building work myself to deliberately keep costs to a minimum, and most other bricklayers/plasterers I normally use will be very much Cash no receipts! Any suggestions? Would HMRC accept a selection of 2-3 builders estimates for the total project as conversion costs?

Also, any other loopholes etc you can suggest? Any viability to keeping the second part for rental, and only selling the main residency? Or am I just prolonging the inevitable?

I promise no more elaborations after this one!!
UK Tax Professional: Sam, Accountant replied 8 years ago
Hi

Thanks for your response - I can understand your frustration!

If you carry out the work yourself, then you can have material costs, but I am sure you can appreciate you cannot claim for your own labour costs.

For the other workers - I do advise that you get them to give you receipts. or you cannot claim these costs either, so you either chose people who are going to put their income and costs through their own accounts - estimates of likely conversion costs will not be accepted, you have to validate the costs incurred - by having the appropriate receipts/invoices as costs actually incurred. If you claim what you do not have evidence for, and HMRC ask to see the receipts etc - and you do not have them - this will not only incur an additional tax charge, but interest and possibly penalties too -

If you keep the second property - so just sell one, then when you sell this second one - there will be no capital gain - as this would have been your main residence throughout.

But then on the flat you do sell, just half the gain would be chargeable so using the example with the sale of both

Sale proceeds 200,000
lessunconverted value July 1988150,000
50,000
lessconversion costs20,000
30,000

Gain

30,000
The gain on the sale of one would be £15,000 in this example

Thanks

Sam
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