CGT selling two things as one

MiniEggs

I have now obtained probate

I will be selling two things as one that have two separate probate valuations

One is the family home and the other is some commercial land immediately behind it

I have an offer that is considerably more than the current value as the land will be worth much more when it is developed

Basically they are willing to pay roughly half way between it's current value and it's potential developed value to avoid complex overage type arrangement

I am happy with this

My question is how to allocate the selling price to each of the two items for CGT

An accountant has advised me that I should do it in a prorate way, which would be 56/44 which seems reasonable accept.....

That would mean saying the house sold for roughly twice it's value and there is no CGT on that and there is a decent chunk of CGT to pay on the land being sold at twice value

If they were sold separately then the land would be sold at about three times value and obviously a lot more CGT

They are being sold together as the house whilst perfectly good it is "in the way" of any development and will almost certainly have to be demolished

I can't imagine it wouldn't raise an eyebrow at HMRC selling a house at twice value ? Even though the whole lot is being sold as one to be redeveloped

Obviously someone should be able to pay what they like for something, but I'm not sure how the selling values should be split

TIA

p00hsticks

How were the probate evaluations obtained ?

MiniEggs

Paid commercial estate agent

Jeremy535897

Is the house your main residence? Was inheritance tax paid on the estate?

MiniEggs

Yes and Yes only very small as everything left to wife

Jeremy535897

If the house was your main residence from the date of acquisition (the date of death if inherited), any gain on it is exempt, unless it has substantial grounds of its own. Can you or your solicitors talk to the purchaser and see whether they will allocate the price paid between the two elements in the contract? That way, if they are independent third parties to you, it is harder for HMRC to argue for a different figure, so long as the allocation is not unreasonable.

If inheritance tax was paid on the estate, HMRC must have agreed the probate values, and they will be the starting point for calculating the capital gains. However, that doesn't really stack up with your sentence "Yes only very small as everything left to wife". Is that you? Did you already own part of the property before the testator died?

If the probate values were not agreed by HMRC, they are only a starting point if HMRC wish to argue about the calculation of the capital gain.

MiniEggs

The IHT should have been zero because whole estate passed to wife but for some reason it was about £50 not quite sure why but I just paid it as there was no point in quibbling it

The house itself doesn’t have significant grounds on the deeds. 

If I do it on a prorate basis then a nominally 375k house sold for over 600k within probably about six months of getting probate.  

It also means the buyer pays quite a bit more stamp duty at the second home rate rather than the commercial rate 

I guess if I don’t do it prorate and say the house is at value and the commercial item has all the gain then hmrc are unlikely to disagree but if I do it the other way and they do they will probably charge me interest on what they see as unpaid tax ?

Jeremy535897

Are you sure the £50 wasn't some sort of fee, rather than tax? This is important, as if HMRC have agreed the probate values, you have a starting point that is unlikely to be challenged. I cannot see how any inheritance tax could have been payable in these circumstances.

The evidence would appear to suggest that the probate values were understated, and if no inheritance tax was payable, it may be worth taking advice on whether they can now be adjusted to something nearer the market value, reducing the taxable gain.

Assuming the purchaser is a company, it would pay a higher rate of stamp duty on a residential property than a commercial property or a "mixed use" property. That is presumably why they want one sale price and not two, so they can get a lower rate of stamp duty on all of the purchase price.

As the acquisition of both plots is required for the development, it seems logical to pro-rate the sale price between the two elements according to the probate value (assuming this is not adjusted). There is no logic in assuming that a greater proportion should be attributed to the house, but equally there is no logic in assuming that a greater proportion should be attributed to the commercial property (if the purchaser has to demolish the house, he may make less profit on that part, but I don't see why that affects the allocation).

If, in the fullness of time, somehow HMRC challenge this and more tax is payable, some interest might be payable, but you will have had longer to enjoy the proceeds. It hardly seems worth paying more capital gains tax at 28% on the off chance that some interest might otherwise be payable.

MiniEggs

Thanks for taking the time to reply

I don't quite understand the form that came back from HMRC but the £50 does appear to be tax

Thanks for your reasoned argument

I am seeing the commercial conveyancer at the end of the month so will asking about selling it as single mixed use as that sounds easier all round. Yes it is being bought by a company

Yes I can make the argument the house needs to be demolished to be able to develop the land in any significant way and has therefore been sold as one

If it do the CGT split prorate and that is the accepted way to do it then hopefully HMRC will see it that way without too much 'optimisation'

I would say the probate values are correct as the two items stand now. Their potential value is much greater but a lot of work and permission would be needed to realise that and therefore is difficult to quantify

The buyer is offering me more than the current value to avoid overage charges in the future which I am OK with because there is no guarantee he will be able to develop the site in the way he wants to. In effect he is taking all of the risk and I don't think an overage charge would get me that much more than he is offering now. So yes with a lot more effort/risk/worry I might end up a bit better off overall but it could take years. If it turns out he has got a bargain then that is great for him I won't spill any milk over it

Jeremy535897

Are you sure the £50 isn't income tax, rather than inheritance tax, either on the estate or the testator?

Selling as a single mixed use plot benefits only the purchaser, not you. However, that might be what gets the deal done, and it sounds like you will gain a significant amount from it.

MiniEggs

The £50 maybe income tax

I won't get a penny, I'm the executor but not the beneficiary

Yes mixed use will help both sides the buyers SDLT and the sellers CGT

Thanks again