CGT on a shop used as part of my house?

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    CGT on a shop used as part of my house?

    Hey everyone,

    I have a question about CGT that I was wondering if you could help me on. I bought my house nearly 2 years ago (it is a shop with a separate flat above it) and moved into the flat, purchasing it with a tenant in the shop. The tenant did a runner before I even completed and I have never heard anything (or had any rent) from him, despite the fact his tenancy agreement runs until 2009 and I have tried to make contact. Now I have never relet the shop, I have used it myself as part of my house (despite being all part of the same semi detached building, it is however not directly connected to the flat, they both have separate doors in the garden), specifically I have a weights bench in there and I work out in there and use it as a mock office. Can/is the shop considered part of my main residence given I have been using it as so, or does the fact that it is a separate shop prevent that from being the case irrelevant of its actual use? Ie can I claim PPR tax relief on the whole building rather than just the flat? It’s difficult to see from the tax info available, even speaking to an accountant she was not completely sure, so I would really really appreciate any guidance anyone has on this.

    Thanks very much in advance everyone,

    Dave

    #2
    Originally posted by deshg
    Hey everyone,

    I have a question about CGT that I was wondering if you could help me on. I bought my house nearly 2 years ago (it is a shop with a separate flat above it) and moved into the flat, purchasing it with a tenant in the shop. The tenant did a runner before I even completed and I have never heard anything (or had any rent) from him, despite the fact his tenancy agreement runs until 2009 and I have tried to make contact. Now I have never relet the shop, I have used it myself as part of my house (despite being all part of the same semi detached building, it is however not directly connected to the flat, they both have separate doors in the garden), specifically I have a weights bench in there and I work out in there and use it as a mock office. Can/is the shop considered part of my main residence given I have been using it as so, or does the fact that it is a separate shop prevent that from being the case irrelevant of its actual use? Ie can I claim PPR tax relief on the whole building rather than just the flat? It’s difficult to see from the tax info available, even speaking to an accountant she was not completely sure, so I would really really appreciate any guidance anyone has on this.

    Thanks very much in advance everyone,

    Dave
    What is the position regarding Business Rates, Council Tax, Buildings Insurance, utility bills etc for the flat and the shop?

    I would think that all the above would point to the fact that the flat and the shop are two separate properties and therefore cannot both qualify for PPR relief as one dwelling.

    Even if you could convince the tax office that you were using the shop premises as your residence, only one dwelling can qualify for PPR relief at anyone time. In that event you need to nominate which of the homes is to be regarded as your only or main residence.


    Ramnik
    Private advice is available for a fee by sending a private message.

    Comment


      #3
      Thanks very much for your response, sadly i suspected that may be the case. I hope maybe you could help me on another related question? In this same case how should/would the capital gain on the shop be calculated? I have looked at the CG34 form (Application for post transaction valuation check) and am unclear. I bought the building (shop with flat above) and the shop was tenanted and the flat was disgusting. I have done extensive modernisation and the flat is now beautiful (!), the shop however is exactly as it was, now minus a tenant who did a runner. I bought the building for £165k and am selling it for £300k. Now as far as i'm concerned a huge huge majority of the capital gain has come from the flat and not the shop, but is this how it's calculated? In this instance should i have an estate agent value the shop and flat retrospectively (lets say he said when i bought it the shop was worth £75k and the flat was worth £90k) and also now (say he said the shop's now worth £100k and the flat's worth £200k) and then claim a capital gains liability of £25k (the increase on the shop, obviously this is before getting into the relevant CGT rate/taper relief etc etc). Or alternatively do they value it based on current value, ie same situation, estate agent says the flat's now worth £200k and the shop is worth £100k, is it just that because the shop's now worth a third of the property my capital gains liability is on a third of the capital gain (about £33k), even though that isn't actually where the gain came from?

      I hope this makes sense, obviously if it doesn't then give me a shout and i'll clarify, i really really appreciate your help as all of these variations can have massive impacts on my final bill by the looks of it!!

      Thanks very much again,

      Dave

      Comment


        #4
        I assume that there is only one Title Deeds to the property although there are separate entrances to the shop and the flat. If so, you have one asset, part of which is used as your home and part as a business.

        It may be that separate calculations are prepared for the shop and the flat. On the other hand, an overall calculation may be prepared and the total gain apportioned on a just and reasonable basis.

        How much of the total gain accruing on the disposal of a dwelling house is attributable to the residential and how much to the business parts of that dwelling house is a question to be decided on the facts of the particular case.

        However, in your case you bought the shop as investment and therefore it is likely that the more appropriate method would be to split the buying and selling prices between the flat and the shop as if you were buying and selling two separate properties.

        You need to apportion the purchase cost between the two on the basis of position at the time of purchase, ie the shop had a lease and a tenant.

        Similarly, you need to apportion the selling price on the basis of the position existing at the date of sale, ie the shop has a lease but no tenant. This may be considered to be on vacant possession basis.

        You then calculate the gain for each using the above information.

        Tax Office CGT Manual at CG74221 - ''Land: valuation: Basis of valuation: land held subject to tenancy'' states as follows:

        ''It is sometimes argued that because the property was sold with vacant possession it should be valued in that state at 31 March 1982 even if it was in fact tenanted. It may be suggested that it is reasonable to value on a like-for-like basis.

        This argument is incorrect and should not be accepted. The purpose of rebasing and indexation is to eliminate any gain which is attributable to inflation. It does not protect a gain which is attributable to securing vacant possession.''

        On this basis, the tax office is likely to want to apportion the value attrubutable to the shop at a higher figure as it is vacant than would have been the case if was still tenanted.

        Also check if Business Asset Taper Relief is applicable to the gain on the shop.

        I suggest you obtain professional advice before entering into any transaction regarding the sale of the property.

        Ramnik
        Private advice is available for a fee by sending a private message.

        Comment


          #5
          Thank you very very much for your comprehensive reply. Almost a side note, but is it just me or is it somewhat contradictory that as you say "although there are separate entrances to the shop and the flat...you have one asset, part of which is used as your home and part as a business" even though this "one" asset cannot be considered wholly my home/primary residence. As i say that's really a side note about the absurdity (in my eyes) and unfairness of the tax system. Maybe i just don't understand it enough! Anyway back to the point!

          What is the situation with valuing the property/parts of the property, do i just get my estate agent who is selling it to value them now and retrospectively and then use those figures? ie Use them to work out my capital gains liability based on the increase in value of the shop part of the property, based on their valuations? I think that is what you are saying. I appreciate this does not yet take into account taper relief or any allowances, but prior to getting into that am i right in thinking that is how i should calculate the basic capital gains liability? Obviously those valuations have to be fair taking into account all factors, but assuming they are is that the right way to go about it?

          The other interesting thing you said was "the tax office is likely to want to apportion the value attrubutable to the shop at a higher figure as it is vacant than would have been the case if was still tenanted". In my case i would definitely say the shop being vacant makes it much much less valuable as it is not a highly desirable area for retail and not having a guaranteed return on investment is far less valuable then an empty shop in a not great area. I appreciate this will completely vary from case to case, but is this assumption generally held in all cases, in which case would it be true to say something as crazy as it may be worth me ensuring the shop is tenanted on sale (assuming it doesn't affect the sale) just to keep the tax office from having any reason to overvalue the shop?

          I totally hear what you are saying about speaking to an accountant and don't worry i will, but i just spent an hour and a half with one yesterday and whilst i feel clearer as a result, i really want to get as good an understanding as possible about the whole thing before i go and discuss it further.

          Thank you so so much for your help, it really really is much appreciated,

          Dave

          Comment


            #6
            Hi Dave,

            You will appreciate that I cannot really go into the exact full details of any individual case such as yours. I feel that I have already gone far enough.

            However, I will add the following:

            (1) Whether the property is one asset or two separate assets is a question of law and fact. Just because they have separate entrances doesn't necessarily make them two separate assets. For example, without first separating the title deeds, could you sell them individually?

            How the PPR relief operates is again a separate issue. If the shop and the flat is one single asset, in theory this could attract full PPR relief depending on your exact circumstances and whether you are able to evidence the full facts as you would like to see them. However, in your circumstances, I doubt very much.

            (2) A lot of things in law and tax in not clearcut. This is why we have the appeal system where court decisions are ofter overturned at appeal and again overturned at a higher appeal. A lot of this is down to interpretation of the law and also interpretation of the facts of each case.

            (3) As far as valuations are concerned, it helps if you have professional valuations which could be difficult to argue against. However, the tax inspectors are on instructions to refer the valuations to the Inland Revenue Valuation Office and to look at the potential tax at stake before they would decide whether or not to challenge your valuations. If you cannot reach agreement, you are able to proceed to the Tax Commissioners.

            Under self-assessment, the onus is on you to submit your tax calculations according to the law and then it is upto the tax office whether to challenge them or not. You are of course free to obtain professional assistance in completing your tax return.

            (4) I am not qualified to answer you how the tenancy would affect the valuation of the shop. I have merely made you aware of some of the relevant issues and it is now upto you how you deal with this. You of course have your accountant to assist you and answer all your detailed points.

            Ramnik
            Private advice is available for a fee by sending a private message.

            Comment

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