Tax on selling land

610Rudy

I've recently secured planning permission to build a house and was hoping someone could clarify a few tax questions for me. My current house is a buy to let semi detached with land at the side. The planning permission is to build an attached house on the land at the side making my existing buy to let a mid terrace. As a mid terrace, it's value will drop by c20% compared to its semidetached status today. I have 2 options, either to build the second house and sell it or Sell the land to a builder. My current preference is to sell the land, but how will the tax work? Ive been told the value of the land is approx 40% of the original house value but how do I work out the cost of the land in order to calculate CGT? Also, can I net off any gain on the land against the loss in value of the original property that is now worth less? Many thanks for any ideas!

xylophone

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/634814/CG_toolkit.pdf

may be worth a read - you could consult a professional valuer.

00ec25

no you cannot net off an actual realised gain against a notional unrealised reduction in value

when you sell the current BTL (mid terrace) your CGT will be based on its then value. That is how you will realise the adjusted value arising from your development

as xylophone says, looks like you will need help from a professional valuer

Pennywise

You'll apportion (split) the original cost of the property when you come to sell either or both. So, when both have eventually been sold, you'll pay tax on the difference between the eventual selling prices less the original purchase price of the house (less other costs of buying/selling along the way).

Yes, there may be a loss in value of the original house, but that's reflected in tax terms by the reduced original cost (as some of the original cost will have been transferred to the new build).

Changes in value have no bearing in tax calculations. The only thing that matters is original cost and eventual selling price. In your case you have two different eventual selling prices (due to two different assets), so you have to apportion the original purchase price between them.

[Deleted User]

Additionally, if you go for the first option, which is to build and sell, this could well be designated as trading in property. This is probably another good reason to sell the land directly to the builder.

610Rudy

Thank you, very useful. If I understand it correctly, I think I calculate the 2 relevant costs using the 'part disposal' formula in the link sent by xylophone. Do you know if when using this formula, you only use the original purchase cost of the BTL or should I add the appropriate costs incurred to 'enhance its value'

Looks like I will need professional help!

610Rudy

Great point - thank you. I prefer option 2

SuperHan

Add the appropriate costs to enhance its value to the original cost. You should also be able to add in any SDLT and legal costs you incurred in buying the porperty.