How to work out CG on a converted house

SnowWhiterThanWhite

Hi,

My parents purchased a small property approx 20 years ago. At the time, my dad was a self employed painter/dec/builder & converted the property into 2 flats which were rented out. Up to 8 years ago, my dad had an accountant, but, since retiring, I've done their tax returns. Both mum & dad have one as they each receive the rental from the flats. (one each)

They have decided to try & sell one of the flats as they now need the capital and will continue to rent out the other one.

Problem is, they have no idea how much the original cost of the property was, or how much the conversion cost at the time. There are currently damp problems with the property which they are trying to sort out prior to selling, I estimate the cost to be approx 5K

Unfortunately, my dad is suffering mild dementia and is totally unaware of the costs/prices of what work was done during the conversion.

My question is, if/when they sell one of the flats, how do I put this on my dad's tax return?
Also, when I did my mum's tax return this year, she received a rebate of exactly the same amount as deducted tax of her interest on some savings. Does everyone who rents out a property have to complete a tax return?

Thanks

fengirl_2

You will have to find out the cost of the property in one way or the other. Do you know the name of the solicitor who dealt with the purchase? As to the conversion costs, yu could make an estimate, but if challenged, you would need to be able to justify it.
Generally, if someone isnt liable to tax, then they dont self assess. Your mother obviously does have to, or she wouldnt get her tax back.

SnowWhiterThanWhite

Thanks for that, they do have boxes of old papers in the loft, I'm going over tomorrow to try & find something relevant.
Does anyone know how I split the cost/valuation of the original property? For example, lets say the property cost 25K, then converted into 2 flats, one of which is being marketed for 60K, does that mean capital gains of 25k/2=£12500, selling price 60k, therefore £47500 profit (less solicitors/estate agent fees etc) ?
Thanks

fengirl_2

Yes, your calculation is correct. Don't forget that they each have a CGT exemption.

SnowWhiterThanWhite

jimmo wrote: »

As a rough and ready method of estimating the potential Capital Gains Tax liability that is probably good enough but, strictly speaking, it isn’t.
　
The property that your parents originally bought is a single asset.
It has been developed or improved by converting it to 2 flats but it remains a single asset consisting of the 2 flats (plus, probably, the freehold reversion).
Flats are traditionally sold leasehold and so when flat 1 is sold your parents will be making a part disposal from their original asset and will retain both flat 2 and the freehold reversion.
The correct method of calculating the Capital Gain on flat1 is to apportion the original purchase cost and improvement costs by reference to the sale price for flat 1 and the open market value of the remainder (flat 2 and the freehold reversion).
In my own experience the freehold reversion is rarely of significant value compared to the value of the leasehold flats but if you fail to recognise that it exists you will run the risk of being caught up in so much red tape that you won’t know whether you are coming or going.
Having read your original post again you seem to have said that your dad owns one flat and your mum owns the other. Is that right?
If so, what legal paperwork is in place to separate the flats to individual ownership and who owns the freehold reversion?

Thanks for your comments. Problem is, we don't know who owns what! My mum has always called each flat his & hers, as they each, individually, receive rent from each flat. However, on quizzing them over the actual legal ownership, they are in the dark. I assume that my dad is the legal owner of the whole property, if I am unable to find any paperwork relating to the ownership, will Land Registry be able to help?

SnowWhiterThanWhite

Hi,

Have managed to locate the original paperwork - the original property was purchased for 30k - I have telephoned Land Registry who have confirmed that it is in the sole name of my dad - also, that the 2nd flat has never been registered with them?? It does have a separate number to the original property.