Capital Gains Tax on Property

Financetiger

Dear Reader,
I have a technical question here for the Tax Experts out there :-) Thank you in advance.  I’ve sold end of last year a property for 400K which was always used as a BTL property.  The purchase price years ago was £320K.  The title deed included a garage at that time, which was valued at 25K, the 25K was part of the original 320K purchase price.
Now the tricky part, the garage has gone up in value as I’ve converted it to a studio flat, and when I’ve sold the property above for 400K, I have not included the new studio flat, which now sits on a separate Title Deed. We are holding on to the studio flat for the time being. 
Does anyone know which calculations for buying/selling price I need to use for the HMRC as a result ? Do I need to put in purchase price of 295K (320-25 as the original garage has not been sold) ? 

Very curious what you guys make of this.

Thank you so much. 

Jeremy535897

The usual rule is here: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12731

The apportionment of base cost is by reference to the sale proceeds of the part sold and the market value of the part retained.

Where land is involved, I think SP D1 allows you to split the original cost instead: see https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71850 That is what you are suggesting. I am not clear whether this is still the case. No doubt other posters will comment.

When calculating the gain on the studio flat, make sure you keep a note of the conversion costs, as these should be deductible from the gain.

Financetiger

Thank you @Jeremy535897 for your kind response.  I knew this one will be a tough one. I always keep an Excel spreadsheet with all expenses and receipts in a separate folder   
Curious what others might add ... thank you.  

I would have used an accountant for the previous tax year, but then I’d learn nothing, this gives me a great opportunity to learn a bit more on Tax affairs. 

Pennywise

Financetiger said:

I would have used an accountant for the previous tax year, but then I’d learn nothing, this gives me a great opportunity to learn a bit more on Tax affairs. 

Trouble is that tax laws change frequently, so just because something was done one way last year, doesn't mean it's done that way next year.  A classic case in point re property letting was the almost ever changing rules each year over the last few years as regards claiming tax relief on white goods, fixtures & fittings etc - literally changes every year.  Not to mention the changes to loan interest relief which are changing yearly at the moment.

jimmo

Jeremy535897 said:

Where land is involved, I think SP D1 allows you to split the original cost instead: see https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71850 That is what you are suggesting. I am not clear whether this is still the case. No doubt other posters will comment.

Quite right but it may be worth considering what impact the choice of method will have on the calculation.

Under the traditional method you should add up the total costs of expenditure and enhancement for the whole property so that the cost of converting the garage to a studio flat goes into the melting pot.

Under SP D1 the original purchase price is split between the house and garage as if they were bought separately. In that case the expenditure in converting the garage to a studio flat will only be taken into account when and if the studio flat is sold. You will need to do the sums on that

One other thing. Whichever way you go HMRC will almost certainly refer the valuation issues to the VOA.

So on the one hand there is the market value of the studio flat on the date the house was sold. On the other there is the market value of the garage on the day the house was bought.

Financetiger

Thank you @jimmo much appreciated. 

What you have suggested below seems the most straightforward way to deal with this. Will now speak with HMRC to make sure they are happy with this.
kind regards. 

Under SP D1 the original purchase price is split between the house and garage as if they were bought separately. In that case the expenditure in converting the garage to a studio flat will only be taken into account when and if the studio flat is sold. You will need to do the sums on that