George & Mary bought their family home in 1996. It costs them £265,000. The property and the separate garage stand in a plot which is just within the “permitted area”. This is normally taken as 0.5 hectares which in broad terms corresponds to 1.235 acres. George & Mary have looked after the property and as it stands today it would probably fetch £1.4m. But George & Mary have other ideas…
Next year they will start converting the garage into a one-bedroom apartment which will have a separate entrance and an outside decking, tastefully laid out. The conversion cost will be £60,000 and the plan is to rent the apartment out for a few years with rental income expected to exceed £10,000 a year.
Phase 2 of the project will then kick in. George & Mary hope to sell their apartment about 5 years later, retaining the main house. They want to know how much private residence relief they will be able to claim when they sell the apartment….
The Response
Let’s make it simple and suggest the following dates:
30.06.1996 Original purchase
30.06.2022 Garage conversion work starts
30.06.2027 Flat sold
The garage will qualify for full main residence relief from the date of purchase in 1996 to the date on which construction begins on the flat. From that point to disposal there is no relief.
It would be simpler to get a valuation of the house and garage separately at a point immediately before conversion but unfortunately there is a statutory rule preventing this approach. Instead, we have to look at the whole gain and then time-apportion to and from 30.06.2022.
Method 1
Get a valuer’s opinion on the value of the garage and the small plot of land it sits on as at 30.06.1996. Assume this is agreed at £19,875 (7 ½ %). The gain will be calculated like this:
| Sale proceeds of flat, say | 400,000 | |
| Less original value | 19,785 | |
| Less costs of conversion | 60,000 | (79,875) |
| Total gain | 320,125 | |
| Main residence exemption – 26/31 years | (268,492) | |
| Chargeable gain | £ 51,633 |
Using today’s exemptions and tax rates George & Mary would only be paying CGT of £7,600 on these figures.
Method 2
| Original Cost | 265,000 | |
| Cost of conversion | 60,000 | |
| £ 325,000 | ||
| Sale proceeds of flat | £ 400,000 | A |
| Market value of remaining house + gardens, say | £1,600,000 | B |
| Sale proceeds of flat, say | 400,000 | |
| Cost x A/A+B Formula | ||
| £325,000 x 400,000/2,000,000 | (65,000) | |
| Total Gain | 335,000 | |
| Main residence exemption – 26/31 years | (280,968) | |
| Chargeable gain | £ 54,032 |
Again, using today’s exemptions and tax rates George & Mary would only be paying CGT of £8,250.
Both examples illustrate the advantage of selling part of a property that has enjoyed the main residence exemption for a number of years. But there are plenty of traps for the unwary.
George & Mary need to be aware that when they come to sell the flat, they will be disposing of residential property which means that a special return and payment of tax due must be made within 30 days of completion.
C&H Stedman will be glad to discuss any similar projects preferably while they are still on the drawing board!
