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Capital Gains when Splitting your House into Flats

January 25, 2016


Are you thinking about splitting your house into flats?

Are you concerned that the tax rules are not all that clear?

The problem – You may be taxed when splitting your house into flats upon sale

You could be looking to downsize or make a little money from your property by splitting it into flats. The issue with this type of activity is that you are liable to Capital Gains Tax (CGT). So, you may think because you owned the house and did some work to it that you would be free from tax. It is not until 6 years down the line that HMRC look at the land registry and investigate the scenario and decide to give you a tax bill upon their estimation of the money you have earned. You will still be able to claim Private Residency Relief PRR but you may have to pay CGT on the remaining gain.

If you rent out the property before you sell it then you will also be able to get Lettings Relief from the gain that you make.

If you are converting one house into flats then you may also reduce the VAT on the labour and materials of the construction costs

Can you relate to the above?

If you have answered yes to these questions then this article will be an interesting read.

An example – House being split into two flats

This example should give you some guidance to see how much tax would be paid

In March 2008 John acquired a large house for £100,000. The house was used as his only residence. In June 2012 he incurred expenditure of £50,000 to convert the house into two flats. He ceased living there when the conversion was started, and the flats were put up for sale. The flats were sold in July 2013 for £150,000 each. The Valuation Office Agency advises that the value of the unconverted house in July 2013 would have been £200,000.

£300,000 sales proceeds

(£200,000) less unconverted value in July 2013

(£50,000) conversion value

£50,000 gain

As John moved out of the property within 18 months (previously 36 months) of the sale then he could claim the PRR, therefor no tax would be charged.

If he sold the property outside the PRR period then he would have paid tax on the £50,000 less the CGT allowance and taxed at the appropriate CGT % rate

You can see another example of this here

Practical steps you should now take to work out how much CGT applies

There are ways to minimise CGT as can be seen in my previous article

It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step by step guide to implement this strategy

  1. Get a RICS valuation done pre conversion to ensure that you know the starting value.
  2. Submit the planning application to convert the property into flats
  3. The purchase cost would be determined by he floor space of the flat that you are selling
  4. Add the costs of construction and ensure that you get all relevant invoices for the construction work
  5. Consider the period that you are selling the flat that you are converting to determine if you can claim PRR
  6. Consider the letting relief if you sell the property
  7. Ensure that you take into account your CGT allowance
  8. Work out the tax that you are likely to pay

Next steps – Contact us to see how much CGT you need to pay and how you can mitigate it

If you want to understand how to implement this strategy or to discuss other finance / tax questions then please book some time with us using the below calendar

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs

 



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk