CGT liability if main home sold in 2 parts?

glasgow_oldie

We bought a house that is in 2 parts, a self contained flat in the basement and house above. The two are connected by stairs with a door that can be locked. It is all one title deed and one council tax.
When we bought it was offered for sale either as 2 separate properties of a single property. We bought it as a single house and it is our main home.
Now we are selling, the agent is suggesting we will do better to split the title and sell as 2 separate properties.
Does anyone know if this will have capital gains tax implications? We have let the flat below intermittently.

John_Pierpoint

It would help if you could put some rough numbers on the problem.
Presumably the basement has its own "front" door ?

Would it be one of those posh Victorian houses with stairs up to the main front door and a servants' entrance down some steps into a "moat", in a built up area?

Ie at the front the occupants have a view at "grass" or paving slab level if they are very lucky?

Did you have to pay tax on the rental income (I don't think the flat would have qualified for rent-a-room)?

glasgow_oldie

Yes, it is exactly as you describe, a Victorian terraced house in Glasgow, 4 bedrooms upstairs, 2 in the basement flat.

The basement flat is entirely self-contained with its own registered address, front door and separate utilities, but connected to upper part by stairs with a lockable door. For this reason, the entire property is on one title deed and one council tax. Apparently, splitting the title deeds is not a legal problem.

We have rented it out about 50% of the time, and used it ourselves when unoccupied.

We have paid income tax on the rent.

Pennywise

I don't think you're going to get principal private residence relief on your basement flat at all. That means that you won't get lettings relief either.

Your CGT will be the sales price of the flat (less costs) less apportioned purchase price of the flat (plus apportioned costs of purchase) less any expenses you've incurred on property improvements.

HMRC regard self contained flats as separate dwellings. Even your occasional use of it as part of your home doesn't automatically mean it was your principal private residence. You can only have one PPR - if, say, you had two houses, only one of them could be your PPR, the same applies with self contained flats.

HMRC do allow for exceptional circumstances, i.e. when you buy two semi's and knock through, or when you buy two flats on the same floor of a block and "live" in them both as the "totality" of your home, but in your case, it's on a separate floor, and also it's been rented out occasionally, both factors will weigh heavily against you.

HMRC may also apply a "quality of residence" test - to have any hope of claiming the basement as part of your PPR, you have to have used it for "quality" of use, i.e. sleeping down there, or using it as your main living area, etc - occasional use as a hobby room or for storage, or using it occasionally whilst redecorating the upstairs, or having it for guests isn't anywhere near enough to justify it as being part of your home.

Unless you do have some substantive "quality" private use and a relatively small total period of letting, I think you've got to accept that you're going to have to pay CGT on it and won't get your PPR exemption.

I don't think things would be different if you sell the whole building as one. You'd still have to apportion the building between the "house" and the "let basement" because of the fact you let part of it out, which would open the exact same can of worms.

John_Pierpoint

Does the voters register and the council tax listing show it as any more than a granny flat? I have in the past tried to buy a house with a custom built granny flat - there was certainly no suggestion that I was buying two properties [The previous owners to the sellers had created it by putting a nice big porch on the front of the house, the door, you could not see from the street, went into a one bedroom (small) self contained flat with a "back door" that lead into a sort of rear porch. This gave both generations access to the shared back garden. My bet is that Granny had financed the extension. I did not get as far as checking to find out what the local council thought it was - might well have been the 15% permitted development. (As you can gather I am from south of the border; laws in Scotland may differ.) A lot of councils get "funny" about creating extra flats - a common worry is refuse and parking.

If the person buying it intends to make it self contained and get the local authority to certify it as a separate dwelling (complying with all the building regulation for FIRE INSULATION etc etc etc - Then I cannot see that you are doing more than selling your tennis court for redevelopment. Perhaps the sensible thing is to redevelop the rent a room accommodation in your basement and then sell it.

However in my heart of hearts I think there may be lots of indicators of independent dwelling and you might get stuck with a council tax bill too.

The basement flat is entirely self-contained with its own registered address,
Where is this "registered"?

Anyone got any case law?

glasgow_oldie

Thank you to you both for these informative replies.

I suppose what we were really worried about was loss of PPR relief on the whole property, not just the proportion of the basement.

This flat is connected to the rest of the house via an internal staircase and a door, which is the reason the council have deemed the whole place under one council tax. The flat does not exist as far as the council are concerned and no-one is on the electoral register. We have had 2 telephone conversations and one unexpected unannounced visit by a council official to look at the place (he was driving by and noticed the additional door to the basement), and they seem happy with the situation, despite the fact that if the flat was split off, they would gain an additional E band income.

I was hoping that we would be eligible for lettings relief under these circumstances.

Concerning the registered address, I do not know as this was all done by the previous owners, but apparently you cannot just put a number plate on a door and call it 62B or whatever. The flat address always appears on address lists generated from the postcode on drop down menus on websites, for example.

dave2

Registers of Scotland holds the two land & property registers in Scotland

Being on the lists of postcodes though, I had to sort that in the past for a parent through Royal Mail. I would assume they have some collaboration with the various Land Registers, mind you, but I should think RM merely look out for new properties, designate a postcode then add it to the RM database.

dave2

I'm unclear what you mean about the internal door. Is there a shared stair to which both of you have "front doors" or do you have a hallway in your home that has a door into the flat? In the case of the latter it seems clear to me that there is 1 property with two kitchens.

Even in the former case, add a dash of paint, throw some carpeting on the stair and take the internal locks off the doors and would you ever consider it two separate properties?

My reading of the HMRC Helpsheet seems imply, albeit unclearly, that even if it is a flat it may still qualify as John pointed out:

Dwelling house
Your dwelling house may be a single building, for example, a detached
house. It may be more than one building, for example, a house with a
detached garage. Or it may be part of a building, for example, a flat. If your
home includes more than one building, for example, if it has several
outbuildings, any relief available for your dwelling house might not extend
to all of the outbuildings.

Example 1
Your home consists of a house, a detached garage and a granny flat near the house, half an
acre of garden and a summer house at the end of the garden. Your dwelling house is the
house together with the garage and the granny flat, but excluding the summer house.

Deciding which buildings make up your dwelling house is only important if
your home has a garden or grounds larger than the permitted area [...]

Permitted area
If your garden and grounds do not exceed half a hectare (which is a little
over 1 acre), you are entitled to relief for all of it. Look again at Example 1.
The summer house was not part of the dwelling house. But the grounds do
not exceed half a hectare and so the summer house, which stands in the
grounds, will still attract relief.
If your garden and grounds exceed half a hectare, you may not be entitled to
relief for all of it. The area for which you are entitled to relief is called the
permitted area. It consists of the area that is required for the reasonable
enjoyment of your dwelling house as a home. The size and character of your
dwelling house must be taken into account.
If your garden and grounds exceed half a hectare, and you have disposed of
all or part of the garden and grounds, you should:
• enter details of the disposal and gain on pages CG 1 and CG 2, and
• explain in the ‘Any other information’ box, box 35, on page CG 2 of the
Capital gains summary pages why you think, if appropriate, all or part is
exempt from Capital Gains Tax.
We may ask for further details in these cases and the District Valuer will be
asked to determine the size and location of the permitted area.

glasgow_oldie

To Dave2

Thankyou for this information. The internal door is as you described in the latter case, a corridor from the upper part of the house and then stairs down which open into the centre of the basement flat. The basement floor also has 2 external doors into the common front and back gardens. Despite the best efforts of the council to get 2 council taxes from the property (which they do from other houses in the terrace), they have given up and clearly regard the place as "one property with 2 kitchens" with the property is all under one title.

If I had ever thought the loss of PPR relief was possible when we first let the basement, we would never have done it, as the rental has been pitiful compared with the potential CGT bill. After a couple of years, it ocurred to me that CGT might be a problem when we sold, and looked at the HMRC information sheet 283 on PPR. I read the first page on eligibility for full PPR and decided I fulfilled all the conditions, including the last one which reads "no part of your home has been used exclusively for business purposes during your period of ownership". The basement has not been used exclusively for letting, but used by us for about 50% of the time.

It is only now with the possibility of selling the house in 2 parts that I have realised the situation may not be as clear cut as I thought, and have no wish to arouse the interest of HMRC.

Pennywise

Just thought it may be useful to give links of some HMRC web pages which tend to suggest the flat won't be regarded as part of the main dwelling house for PPR purposes:-

http://www.hmrc.gov.uk/manuals/cg4manual/CG64309.htm "each self contained unit is itself a dwelling house"

http://www.hmrc.gov.uk/manuals/cg4manual/CG64311.htm "A fully self-contained flat with its own access from the road will not be regarded as part of the owner's dwelling house even though it may be part of the same building"

But, as per my original post, there is the possibility of the flat being allowed as part of your PPR http://www.hmrc.gov.uk/manuals/cg4manual/CG64311.htm
"However, this is for guidance only and any question as to the extent of the dwelling house should be decided on the evidence"

I still think that whether you will get PPR relief and letting relief on the flat will depend on the quality of your use of it during your ownership as I said originally. By renting it out half the time, I think you may struggle. A lot will depend on what you used it for - if it was an integral part of your "home" and was regularly used, then go for it, but if you only used it for storage or hobbies or occasional use, then I really can't see HMRC accepting it was ever "part of your home".

glasgow_oldie

To Pennywise

thank you for those links - you obviously know your way around the HMRC site better than i do.

What do you think would happen if we sold of the upper part of the house, and went to live below in the flat as our main residence for a year or so, and then sold?