Tax liability on building plot??

Simonb_2

Hi, the dilemma I have is...

18 months ago we bought a 2 bed house with a large garden for £217,000 and with a mortgage of £185,000 against it. The house is now worth about £185,000 due to the price crash.

I am now in the process of apply for planning permission(plans drawn up but not submitted yet) to build a 3 bed detached house in the garden. Assuming the planning gets approved the plot would be worth approximately £85,000, and if the house was built approx £220,000 and it would devalue the existing house to about £160,000.

What I am trying to decide is whether or not to build the house or sell the plot just with planning permission. Or even sell our existing house to raise the money to build the new one or even sell both and move on.

The questions that I have are:
1. What tax liability will I have with the above options i.e. CGT?
2. Is there anyway of minimising this?
3. At what point do I need to tell my mortgage company?

We are also looking at the possibility of emigrating at the end of the year so living in the new build for 12 months isn't really an option but renting it out would be if it helped.

All comments are welcome!

Thanks
Simon

Simonb_2

Am I right in thinking that there will be some capital gains tax to pay one way or another if I sell?

dozy_dora

I too have been in this dilemma and from what I recall I think that you will pay no capital gains tax if you sell house and land at the same time, other options you will. You can however, deduct 'costs' from the amount of gain you declare eg 'cost' of the land at time of purchase. you can get info from www.hmrc.gov.uk/

HTH

Cook_County

I can see from your previous posts that Simonb is an Estate Agent. What professional exams were required to take up that profession? Did these not cover tax on property?

I ask this because the property has only been owned a short time & the owner is already talking of development & indeed would have specialised knowledge on property development. This may appear to be a venture in the nature of a trade to HMRC.

Pennywise

I'd agree with the last poster.

Building a house on the land with the intention of selling it would indeed be trading - you'd have to register as self employed and pay income tax and NIC on the profit - not capital gains tax. This means you lose the annual exemption and the lower CGT rate, but may gain as there'll be more allowable expenses, such as loan interest.

If you sold it as a building plot, it would indeed be capital gain, although as the value has fallen, that's irrelevant anyway as it would be more likely to be a capital loss - depends on who applies for planning permission I suppose as to its value when you bought as opposed to value when sold.

Cook_County

But...woudn't he WANT to argue he is trading then so he gets to set his loss against other income - including potentially carrying it back to years of possibly higher earnings...