House into Flats - tax issue

[djb]

Hello all. I have owned a large detatched house which I paid £73,000 for since Feb 2002 and I rented it out for 2-3 years as a shared house. Due to constant problems with tenants I decided to let it become empty. I then decided to change it into seperate flats and have now converted it into 2 X 1 bed flats and 1 X 2 bed flat. I re-mortgaged the house up to £135,000 to fund the conversion & I have almost completed the renovations which is going to come to around £50 - £55,000 and the asking prices for the flats are £85k , £95K and £130K giving a possible sale total of £310K. What I am asking is how much CGT am I likely to have to pay and is there any way of minimising this? Thanks in advance.

[Tax Accountant]

Hello all. I have owned a large detatched house which I paid £73,000 for since Feb 2002 and I rented it out for 2-3 years as a shared house. Due to constant problems with tenants I decided to let it become empty. I then decided to change it into seperate flats and have now converted it into 2 X 1 bed flats and 1 X 2 bed flat. I re-mortgaged the house up to £135,000 to fund the conversion & I have almost completed the renovations which is going to come to around £50 - £55,000 and the asking prices for the flats are £85k , £95K and £130K giving a possible sale total of £310K. What I am asking is how much CGT am I likely to have to pay and is there any way of minimising this? Thanks in advance.

The simple answer is that you have a gain of £310K less (£73K + £55K). This will be reduced by taper relief and annual exemption. Most, if not all of the gains will be taxed at your higher rate of 40%.

You could consider selling in different tax years but this depends on whether you have any surplus basic rate band availability.

Also consider transferring part or whole to your wife, if you are married.

I don't consider that there are any significant steps you could take to reduce this, short of emigrating and selling and not returning to the UK for at least 5 complete tax years. You have then to consider the tax position of the country to which you have become a resident.

But in view of the large gains, you may wish to consider taking expert advice to see if it is possible to take any meaningful steps, and if so, to see at what cost.

Ramnik

[djb]

Thanks for the reply. As i have no experience of CGT could you tell me what the taper relief and annual exemptions are likely to total up to ?
Am i right in thinking that i have a gain of 182k ( 310 - 73 -55 ) and i will have to pay 40% of the 182k in tax ? I had heard that you pay no CGT on the last three years of ownership , would this count in this case ?
As a side issue, my own Ltd company did the renovations on the conversion of the house so if the building costs were shown to be higher ( by my company making a larger profit margin for the work ) would it be beneficial of paying less CGT on the sale as opposed to possibly paying more income tax by my company ?
Sorry for my total lack of knowledge on this but I have not sold any houses until now , I had a policy of keeping all my renovations but i need to move this cash into future investments. Thanks again.

[Tax Accountant]

Thanks for the reply.

As i have no experience of CGT could you tell me what the taper relief and annual exemptions are likely to total up to ?

Am i right in thinking that i have a gain of 182k ( 310 - 73 -55 ) and i will have to pay 40% of the 182k in tax ?

I had heard that you pay no CGT on the last three years of ownership , would this count in this case ?

As a side issue, my own Ltd company did the renovations on the conversion of the house so if the building costs were shown to be higher ( by my company making a larger profit margin for the work ) would it be beneficial of paying less CGT on the sale as opposed to possibly paying more income tax by my company ?

Sorry for my total lack of knowledge on this but I have not sold any houses until now , I had a policy of keeping all my renovations but i need to move this cash into future investments. Thanks again.

Taper relief applies after you have owned the property for at least 3 complete years. It reduces your gain by 5% after 3 years and increases by 5% for each complete year thereafter until it reaches a maximum of 40% after 10 years ownership. as you bought in Feb 2002, you may have taper relief of 10% x gains of £182K = £18K.

Annual Exemption is an allowance which exempts the first so much of your chargeable gains. This is currently £8,800.
So, if you sell now, your gains will be reduced by £18,200 and £8,800.

The last 3 years exemption applies to a property which has been your only or main residence at any time in your ownership. As this property was never your home, you cannot claim this unless you actually use one or more flats as your residence. If you use a particular flat as your residence, you may be able to nominate that flat as your main residence for Private Residence Relief.

I am sure your accountant could advise you about the detailed rules.

As to the renovation work by your company, they should charge you the going rate and you cannot or should not fiddle around this amount. The company cannot charge you more, or less, because you own the company.

Again, you should consult your accountant for full details.

Ramnik

[djb]

Thank you very much for your help. I am much more informed than I was before. Although i never lived in the house it was classed as my main residence for about 2 years and all the bills and Council Tax were sent there in my name and paid by me so I will have to look into the PPR aspect of it.Thanks again.

[Tax Accountant]

Thank you very much for your help. I am much more informed than I was before. Although i never lived in the house it was classed as my main residence for about 2 years and all the bills and Council Tax were sent there in my name and paid by me so I will have to look into the PPR aspect of it.Thanks again.

You say that you never lived in the house before. If so, you are not entitled to PPR relief even if Council Tax and other bills were sent to that property in your name. Actual residence is vital to be able to qualify for main residence or even to be able to nominate a second home as your main residence.

Ramnik