Acquired townhouse via trust of late grandmother, converted into 4 flats, CGT q's as now selling.

Philomeena

Sorry for the epistle, but hang in there!    Please? We got this house through our gran over twenty some yrs ago. It was our childhood home, and came to us as our mother had died many years before our gran and our dad raised us there.  Dad left us to it when we became 18 and 21, so that we could let rooms to students, but then we got fed up with that as dad predicted!    Got an architect and a construction loan to draw down. At end of 2 years of hard graft after gutting the place, we had 4 flats ready to let to proper tenants with much of the work done ourselves and we ran our own trades for the serious stuff.  We used our late Gran's solicitor to make separate leaseholds for all 4 flats. Two for me (sister), two for brother. We used a proper letting agent so we could get the best tenant possible and who would do all the aggro stuff. Brother, dad and myself relocated elsewhere. The house of flats was to be our pension pot for someday.  

A 'reconciliation' was sheet made on the day of settling up with the construction loan bank when we were done, inspected and ready for the letting company to have tenants move in.  The signing of each of the leaseholds mortgages we granted to ourselves (as two FH'ers to us as individual LH'ers of two separate flats each), it shows the £800,000 construction loan in one column, along with other related items.  In the other column it shows the premiums for each flat's lease. They vary in amount, eg, not £200k per flat but the premiums for the 4 flats do add up to the £800k construction loan. The mortgage company did the evals for the flats. Therefore, each premium for each flat's leasehold became the amount of the BTL mortgage. All of the leasehold mortgage proceeds were then given to the bank that loaned us the £800k to pay off that loan.

So far, till recently we let the all four flats over the last 20 years. We looked after the building ourselves as freeholders, but used an agent for finding and managing tenants and taking care of general flat maintenance. Our mortgages are interest only, but compared to today's market value of the flats, they are reasonably small so we don't feel too much of a sting from the gov't removing the ability to write off mortgage interest.  

Now FF to today I have had to sell both flats. Brother keeping his.  As we got the original single family house through a trust from our Gran, I am trying to understand what my cost basis is for each of my two flats' for CGT purposes post-sale. It certainly is not ZERO. We assumed this building of flats would be our pension some day, not wanting to sell our childhood home, and so unfortunately did not keep very good records of the actual costs of materials and labour to build the flats.. No VAT relief as it was not to be our flats to live in, just to let. Yes, many stupid mistakes made!  Our rental agent does all the accounts for the letting side. We just pay insurance, landlord's utility supply, etc. We do serious maintenance ourselves, like mending the rendering, clearing outside drains, painting the outside, etc. We get in roofer or carpentry trades when such is needed. Yes, that will change with new owners in building, not an issue.

As we both used the leasehold mortgage monies lent to us to pay off the £800K construction loan, and those leasehold mortgages for each flat just happen to be the same as the Premium listed in the lease, eg £150,000 for one flat and £170,000 for the other, do those amounts represent the build costs for each flat?  If so, are those considered the 'amount paid' for each leasehold as they make up a portion of the payment to the lender of the £800k construction loan?

The premiums paid, £150k and £170k were for leases that run 999 years. Of course they are down now to about 980 years.  The amounts realised from the sales are about £400k each.  I know I need to speak to an accountant about this, but if someone out there has experience and can share, then I would feel more confident in choosing an accountant who will know how to handle this. I need to find the appropriate way to demonstrate how my two flats represent half of that construction loan borrowed and paid back with leasehold mortgages which I was granted for my two leasholds. And those leaseholds have now been sold.  So are the mortgages for each leasehold, presented in the lease as the premium paid, suitable evidence for showing that the debt to build was paid off by these leasehold mortgages?  Sorry for long explanation... I have to set it out just so I can make some sense of it,  If our architect had not passed from Covid, this might not be so difficult as they could have given a report stating that he can verify that the contruction funds of £800k was used appropriately and could parcel that amount to each flat. But without them, we only can see the Leasehold Premium as having any direct connection to the construction loan.  Thanks for reading. Any comments welcomed.

Keep_pedalling

I think you need professional advice on this one.

[Deleted User]

Keep_pedalling said:

I think you need professional advice on this one.

Agreed. I would go as far as to say that a tax lawyer would be the best way to go - a complete minefield!

sheramber

[Deleted User] said:

It's complicated. I have no idea of what the answer is.  So I've set out some thoughts and what you might want to gather together before seeing your accountant.

1. When you sell residential property like this there may well be a capital gain.  You have 30 days from selling to report and pay your tax so you need to act promptly and not leave it to the normal self-assessment deadline: https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020

2. Your gain is basically (i) your sales proceeds, less (ii) selling costs, less (iii) your base cost, less (iv) costs of improving the property.  You may also be able to reduce that further depending on whether you lived in the property.  But all the bits and pieces you have done make it quite complicated.

3. You can deduct £6,000 annual exemption from your gain (if not used elsewhere) and any tax will be due at 18% and/or 28% depending whether you are a basic rate / higher rate taxpayer.

4. There are lots of complications with what your base cost is though...

5. You and your brother will have a base cost equal to the market value of the whole property at the time you acquired it.  This will depend on what the exact facts surrounding the trust was.  If it was a bare trust then it may be the value used for probate when your grandmother died.  Or it might be the market value when your dad transferred it to you.  So your accountant will need to know a bit about the trust and those values.

6. At some stage you split the freehold and the leaseholds.  That will mean that you have to apportion the base cost (and the cost of any improvements carried out at that stage) between the value of the freeholds and the value of the leaseholds.  If you owned the property alone, this would not be taxable (although see my next point as you own it with your brother) but it is a calculation that would need to be done.  So your accountant will need to know about the relative values at that time.

7. At or around the time the leaseholds were created (and assuming you owned the property equally), you started by owning 50% of a property and ended up owning (i) 50% of the freehold, and (ii) 100% of the leasehold of two of the four flats (rather than 50% of the leasehold of all four flats).  Going from owning 50% of four flats to 100% of two flast would be a disposal of part of your interest to your brother (and vice versa) and that would be taxable. As you are "connected" with your brother, this would be treated as having taken place at the deemed market value (which may be quite different to the leasehold premiums you paid).  So if you have any details of what was reported on your self-assessment tax returns 20-odd years ago, your accountant would be pleased to see that.  Now there was an extra-statutory concession (D26) which has now been enacted as s248A+ TCGA that may have meant that no tax was due.  Some accountants know about that section, some don't and so it would be worth reminding her of it.

8. I mentioned that the costs of improving can be added to your base cost (and this would include costs of solicitor for creating the leaseholds).  You can't include a notional cost for the time you spent on doing the work personally (unless it was through your company or, perhaps, you were self-employed and charged yourselves for that and included it in the profits that were taxed).  So your accountant would want details of that.  You won't get relief for any interest costs on the construction loan.

9. If you paid yourself the leasehold premiums then you won't be able to add them to your base costs (although if you included paid tax on the deemed market value in my point 7 above then you'd be able to add some to reflect the deemed market value consideration paid to your brother).  If you effectively paid the "premiums" by that being your share of the construction loan that you paid off (indirectly, through the new mortgages) then you won't get a deduction for that.  Instead you will get a deduction for the costs of things paid for with the construction loan and the "premiums" would be good evidence of what these costs were and how they were shared between you and your brother. Those improvements costs would generally be deductible but may not all be (e.g. if they included the interest on the construction loan).  So your accountant would need to understand who you paid the premium to (and whether it is a real premium or a "premium" used to repay your share of the construction loan) and it would be helpful to have details of how that money borrowed (and any other money) was spent.

10. If you lived in the property as a whole (after you beneficially owned it), or lived in any of the flats, then give your accountant details (e.g. the dates you moved in and out) so that they can work out if any principle private residence relief is available. 

For completeness, I know little about property tax and so everything I say may be completely wrong.

From the link you quoted 

You must report and pay any Capital Gains Tax due on UK residential property within:

• 60 days of selling the property if the completion date was on or after 27 October 2021

Philomeena

Thank you all for your responses. Lots to think about. One thing we did not consider when thinking about how CGT fits in, is what the market value of the building was in 1998-9 when the house came to us via the trust after gran had passed. When gran created the trust,  we had it appraised as it was and it came out at £500K. 

It was in rather poor condition inside as when gran had it originally from the early 1950s, she let rooms out as bedsits for local academics as we are surrounded by a uni and several private schools. When my dad married mum, we eventually came to live in the building so we could attend a local school (not the privates) as our village school did not have the facilities for sports, etc. This was the beginning of the 1980s.  So the four of us moved into it and it was kind of like living in the Munsters House. A bit dark, no central heating, scarce light fixtures, the one bath, toilet and kitchen were right out of the 1950s. I can say I never went into the basement until we started gutting the building. And gut it we did, all walls, floors, everything had to be sorted to me building code for developing into flats. As kids, we only used about 1/3 of the house. Whilst gran was alive she didn't want to make any improvements. She lived up north and never came to visit so I don't think she realised what condition it was in, especially the roof. Dad did some essential work to try to make the parts we used comfortable, but he wasn't sure whether he and mum would be staying in it as a for ever home. They actually saw it as a millstone around their necks and when gran would pass, they were planning to sell. But mum dying took that option away from them.

So we were there for all of the 80s, including after our mum died as we were in the local schools, then my dad said he was going to move elsewhere once we finished school/uni and leave the place to us if we wanted to let to students, etc if gran OK'd it (she did) as I mentioned already. Or we could sell it. The house was never left to dad, it was left to us as the grandchildren through the trust created with the house the only asset.  Gran lived the required amount of years  (just!) required for the house to come to us via the trust, so it was all straightforward.  Because it was in the family for so many decades, we were lucky to get the construction loan as the architect guided us in the planning application process and acquiring the financing to break the building into the 4 flats. He was a lovely chap and we still miss him terribly. 

So that is where we are. And will definitely be seeking an accountant first who has more expertise than our basic one who does our self-assess for our rental income stuff. It's out of his league.  There has to be a base in some form. We just have to find out if it would be something like the market value of £500K or if the £700K construction loan to create the flats would be the base cost for calculating CGT.

Thank you again, everyone. It is really appreciated. Especially those who took the time to go into such detail!