Building a house in my garden capital gains tax

merking

Hi looking for some advise about capital gains tax. We bought our house in 2008 and built a garage on the side, in 2017 we thought it would be a good idea to see if we could build a house in the space the garage is in so started to get plans drawn up. We submitted plans and after a lot of time and discussions with the council they granted planning permission for a three bed detached house.  We had it valued and then got quotes for it to be built.  We split the title deeds and knocked the garage down and started building in June this year.   We thought about moving into it but realise it will be too small for us so have thought we should sell it.  We are very confused about whether we can include the value of the land as part of our costs because our accountant has said we need to know what the land was worth when we bought the property. This would then be the amount we use as part of the costs.   Has anyone else gone through this as we are worried that we are going to have to pay a lot of capital gains tax on the sale if we can’t include the value of the land with The planning permission.  

pjcox2005

It's not something I've looked at so this is very high level, but my opening concern is whether you're not actually under capital gains tax rules but rather income tax as you're building a property with the intention to sell at a profit (i.e. a trade of property development).

If that is the case, then I think potentially the land/garage transfers into stock at the date you start the project so you need to know the value at that point and whether that is covered by any exemption like principle private residence ("PPR") (e.g. if it falls similar to being able to sell part of a garden and still be covered for PPR). If not covered you may still want that disposal into stock to fall as capital gains tax at the lower rate rather than taking the exemption that could push profit into income tax rates.

Currently I would expect that if you're planning on making a substantial profit then you'll have a very big tax bill coming your way. You may want to review this and consider what planning could be put in. For example, given your original house may not feel the same with close neighbours, then would you consider selling that home, moving into the new build and perhaps selling in a few years to get PPR.  Potentianlly that may not be covered if the actual intention was to trade i.e. develop to sell and realise a profit.

As I say, I could be wrong as not had to look at it before, but I'd go back to the accountant and make sure they've got the tax knowledge to deal with this. 

Jeremy535897

You should have taken advice from your accountant earlier. You spent nothing on obtaining the planning permission except fees to the council and fees to your advisers. You do not get an automatic uplift in the capital gains tax base cost because you got planning permission.

There are various scenarios that could have happened. From best to worst:

• build new house with the intention of moving in to it, move into it, sell old house within 9 months, then sell new house later. Both sales should be exempt from all taxes due to main residence relief
• build new house with the intention of moving into it, but decide not to, keep it for a while, rent it out, then sell it later. Pay capital gains tax on the sale of the new property, based on sale proceeds, less sale costs, less costs of building the new property, less planning fees, less an allocation of the original property's cost based on the value of the land built on as part of the whole. Original house remains main residence and therefore exempt from capital gains tax
• build new house with the intention of selling it at a profit, never live in it, and sell it as soon as possible. Pay income tax on the profit made (calculation will be similar to that for the capital gain in the second option). Original house remains main residence and therefore exempt from capital gains tax

merking

Thanks for the comments, we initially wanted to move into it but now it’s built it isn’t as big as we were hoping so don’t want to move into it as our house is bigger and more suited to us.  We have considered renting it out but feel the cost of it would buy two smaller properties therefore having a better return.  The profit we make is dependant upon whether we can use the value of the land into our build costs.  The land was valued at £120k  build costs are around £200k and estate agents think house will be worth £350k when completed. If these are the figures then our profit would be £30k. If we looked a the cgt then our exempt amount would be £12,300 each so we would then have to pay the cgt on £5400.  Does this look right?  We are getting different opinions from our old accountant and our new one

Jeremy535897

As I explained, you cannot get a tax free uplift in the value of the land because you got planning permission on it. There is no reason why you should, unless you go back to the days of Development Land Tax in the seventies, and that was infinitely worse.

lincroft1710

merking said:

Thanks for the comments, we initially wanted to move into it but now it’s built it isn’t as big as we were hoping so don’t want to move into it as our house is bigger and more suited to us.  

Surely you must have known how big it was when you submitted the plans for planning permission and building regulations?

pjcox2005

This article may be useful https://www.taxinsider.co.uk/selling-the-garden-when-does-main-residence-relief-apply-ta (Jeremy535897 feel free to correct if wrong).

Do you have two transactions:
1) Being transfer of the land into property development stock at the start of the project so £120k less acquisition price (hence accountant wanting to know value at time of purchase). So say £50k which may be high, then £70k profit subject to capital gains tax which your two personal allowances could be utilised - so £45,400 assuming high rate tax payers then at 28% would be a £12k tax bill. Although in practice two separate calculations. No principal private residence relief as not developing the garden.

2) The development of the property which I think could still be considered a trade and subject to income tax, or at least you'll have to quite clearly evidence intention it isn't to HMRC if selling immediately. Then it would be £350k sale price less £120k land (already taxed above) and £200k development leaving taxable profit of £30k. That would be taxed at say 40% for higher rate payer so £16k tax.

So in total about £28k tax, which is about £25k higher than you're currently expecting.

Pennywise

Assuming it is liable to CGT as an investment rather than income tax as an adventure in trade, then your base cost is the apportionment of the area of land as a proportion of the total cost of buying the house in the first place plus the cost of the PP, architects fees, etc etc.  As said above, you can't use the land value with PP.
If, say you bought the house for £200k and the area of the land upon which you eventually built is say £20k of that, then £20k is your CGT base cost.  It's irrelevant how much the plot is worth with PP when it comes to CGT.
But as said above, there is a real risk that you're "trading" and the profits subject to income tax rather than CGT.  
If you're getting conflicting advice from your "accountants", then I'd wonder whether they were properly qualified/experienced to deal with land transactions - it's a very specialised area and your bog standard general practitioner may struggle.

sheramber

You need to account for  tax on the increase in value of the land by adding planning permission to it so the apportioned base cost when you bought the property is the starting figure.

Jeremy535897

pjcox2005 said:

This article may be useful https://www.taxinsider.co.uk/selling-the-garden-when-does-main-residence-relief-apply-ta (Jeremy535897 feel free to correct if wrong).

Do you have two transactions:
1) Being transfer of the land into property development stock at the start of the project so £120k less acquisition price (hence accountant wanting to know value at time of purchase). So say £50k which may be high, then £70k profit subject to capital gains tax which your two personal allowances could be utilised - so £45,400 assuming high rate tax payers then at 28% would be a £12k tax bill. Although in practice two separate calculations. No principal private residence relief as not developing the garden.

2) The development of the property which I think could still be considered a trade and subject to income tax, or at least you'll have to quite clearly evidence intention it isn't to HMRC if selling immediately. Then it would be £350k sale price less £120k land (already taxed above) and £200k development leaving taxable profit of £30k. That would be taxed at say 40% for higher rate payer so £16k tax.

So in total about £28k tax, which is about £25k higher than you're currently expecting.

This analysis is a more in depth analysis of my third option, which is why I used the shorthand "calculation will be similar to that for the capital gain in the second option". The reason the above analysis is wrong in detail is that the timing of the transfer to trading stock would have taken place at the point in time the decision to seek planning permission was made, not when it is granted. Consequently there is probably only a very modest capital gain arising on the transfer to trading stock, which it could be argued was exempt from capital gains tax due to main residence relief, assuming that the garage was used with the house as the main residence.

There are also rules concerning the election to effectively hold over the capital gain on a transfer to trading stock, and the anti-avoidance legislation that can apply to land with development value in some circumstances. It is a very complex area and needs specialist advice.

merking

Thank you for all your comments, it seems to me that our best option to avoid a huge tax bill is to move into it and sell our current house. We have clearly misunderstood the information on the capital gains tax and the details of building in your garden. Really appreciate the info