Am I liable for tax building two properties on my residential land?

by Readers Question

15:20 PM, 7th April 2016
About 3 years ago

Am I liable for tax building two properties on my residential land?

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Am I liable for tax building two properties on my residential land?

I own a property that I have lived in for 30 years. I have just gained planning permission on a section of land adjacent to my house for 2 x 5 bedroom detached houses.Building

The land is on a separate title which is approx a third of an acre I’m planning to build the houses myself and sell on.

Am I liable for tax on this ?

Chaz



Comments

matchmade

16:13 PM, 12th April 2016
About 3 years ago

You need to take some urgent professional advice from an accountant with experience of property development. If you build the houses yourself you will definitely pay capital gains tax when you sell the houses at 18% up to the basic rate threshold and 28% after that; if the HMRC classifies you as a speculative property investor rather than someone "in trade", there's a danger they will try and add your gains to your income and try and tax you at 40/45% income tax rates.

Also, is this land part of your property's garden, or could it be presented as such by judicious removal of fences, hedges etc? When did you buy it? If the land qualifies as part of your Principal Private Residence, then any capital gains if you sell the land will be tax-free provided it is less than half a hectare (1.2 acres), which appears to be the case here unless you already have a big garden. You could then sell the land to a new development limited company set up and controlled by yourself, and the cost of the land (40-50% of the eventual value) will be free of CGT. Your development company would then build the houses and sell them, or perhaps keep one as an investment to rent out, and would pay corporation tax at 18-20% on the profits. You could then wind up the company and you will have paid much less tax than if you build the houses as a private individual.

It is perfectly possible to have two titles within the boundary of one residential house, so provided you have managed the adjoining land like a garden, have an access route from your house, can demonstrate long-term ownership and that you have used it like a garden/orchard/wildlife reserve, then you will have a strong case that the land is part of your principal residence and therefore free of CGT when sold.

matchmade

16:14 PM, 12th April 2016
About 3 years ago

Reply to the comment left by "Tony Atkins" at "12/04/2016 - 16:13":

Chaz - I would also add that you need to be careful and get your facts sorted out first as regards this land: there are cases where someone got planning permission for a new house in their back garden, built a fence to separate the two plots, sold the land, and was hit for a heavy CGT bill by the Revenue, because they argued the fence meant it had ceased to be a normal part of the garden and was therefore no longer part of the residential curtilage.

If you decide not to proceed the construction, I'm a small developer and might be interested in buying the land off you!

Sunny K

8:24 AM, 13th April 2016
About 3 years ago

Hi Tony,

Would the CGT liability be nil if :
1. If you were to sell your existing house and start living in the new build? Or 2. Declare the new build as main residence while keeping the existing house and than sell the new build some time later getting the PPR relief?
I agree that limited company is better for trading purposes.

matchmade

11:44 AM, 13th April 2016
About 3 years ago

Hi Sunny,

If I've understood you correctly:

Scenario 1: you would be acting as a self-builder here, i.e. building your own new Principal Private Residence on land you already own. The rules allow a transitional period of up to a year in which you can have two PPRs at the same time, to cover situations when you are renovating an old house whilst living in your existing PPR, or where you are building a new home, as here. So if you carried on living in your current house, built the new one, then moved into the new house and immediately sold the old one, there would no CGT to pay on either property.

You could also keep the old house and rent it out, perhaps with a BTL mortgage. You would then benefit from continuing house prices on this old house, and when you eventually sell, you would still get PPR relief for the period you lived in it, plus an 18-month grace period. So for example if you lived in the house for five years including the time spent building the new one, then rented the old house out for another five years, then sold it, you would only be liable for CGT on 3.5 years out of the total 10. You would also get the so-called Lettings Allowance, and if the old house were jointly owned by you and a partner, you would also get two lots of annual CGT allowance.

The self-build approach would also have the advantage that you would not need to pay any Community Infrastructure Levy (CIL), if your planning permission includes that. Self-builders are exempt from CIL.

Scenario 2: this is similar to what I've outlined above, but you would be selling the new house after a few years rather than the old one. Again, you would be exempt from CGT for the years you live in each residence. The great advantage of moving into the new house is that you pay no CGT on the increase in value during construction. If you declare the new house as your PPR, you need to provide clear evidence that you have actually lived there as well.

Scenario 3: you said you have permission for two new houses. You could consider doing a phased approach to the construction, all to save on CGT. In other words, live in the Old House while you build New House 1. Move into New House 1, which will include the land available for New House 2. Sell the Old House to raise cash if you need this, or at another time that suits you. Now start building New House 2 whilst living in New House 1. Move into New House 2 as your new self-built home, and sell New House 1 if you need the money, or at another time that suits you. Total CGT bill = zero, except for CGT on any price increases on Old House or New House 1 if you keep them for a while after moving out.

You should have three years in your planning permission to build both houses, so this gives you ample time to finish New House 1, move into it and establish residency, then build New House 2 and move into it as your final new home.

Again, you should check all this with a tax accountant, and it's not worth being too clever and only living in New House 1 for 3 months before moving into New House 2. If HMRC think you are abusing the spirit of the PPR rules and acting as a speculator, they will clobber you and try and tax your capital gains as income.


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