CGT/VAT/Income tax on new build in garden

[FingersAndThumbs]

Hello. I'm thinking of going for planning permission for an additional house in the garden.

 

If I sell the plot then if I understand correctly I don't have to pay any capital gains, as it's from my PPR and the garden's less than half a hectare.

 

What happens if I build the house myself to either sell on or to let out?

 

Looking online there seems to be various combinations of CGT, VAT and income tax payable. Can anyone unpick?

 

Many thanks!

 

 

 

[nod]

If you sell the new house or rent 

You won’t be able to claim the vat back and you pay tax on the sale 

However if you was to move into the new house sell your own house 

There would be nothing stopping you from selling the new house once all the utility’s are in your name and also claim the vat back on completion of the new property 

[newhome]

Do you have CIL in your area? If so you can get exemption as a self builder but you have to live in the property for 3 years after completion or you have to pay the full charge. 

 

If you build the new property to live in yourselves you will have 9 months from the completion date to sell your old property to avoid CGT and you will avoid all of the issues of not being able to reclaim VAT, potential CGT on the new house, and you will avoid CIL (subject to staying for 3 years), and you get a brand new house to boot. 

[ProDave]

17 minutes ago, newhome said:

 

If you build the new property to live in yourselves you will have 9 months from the completion date to sell your old property to avoid CGT and you will avoid all of the issues of not being able to reclaim VAT, potential CGT on the new house, and you will avoid CIL (subject to staying for 3 years), and you get a brand new house to boot. 

Can you explain that highlighted statement?

 

I looked into this because of the changes in PRR that come into effect in April.

 

Even after the changes, I understood you still got PRR for all the period the old house was your main residence, and for the last 9 months of ownership (used to be 18)  And would only be liable for CGT if you own the old house for more than 9 months after moving into the new one.  And then you would only be liable for the portion of the gain outside the PRR exemption.  

[newhome]

15 minutes ago, ProDave said:

Even after the changes, I understood you still got PRR for all the period the old house was your main residence, and for the last 9 months of ownership (used to be 18)  And would only be liable for CGT if you own the old house for more than 9 months after moving into the new one.  And then you would only be liable for the portion of the gain outside the PRR exemption.  

 

Yes, I should have said 'avoid any CGT' and by that I mean tax on any gain after the 9 months grace period. They can only tax you on the gain anyway, they can't tax you if the property hasn't increased in value at all. If you don't sell your house in the 9 month grace period (from April 2020) then CGT may potentially be due if the property increases in value from the 9 month date, and you only have liability on the gain from that date. 

[ProDave]

It is further complicated by the fact that hmrc take the purchase price and sale price and draw a straight line.  Real house prices don't do that.  It could make a massive gain while you lived in it, and then make no gain at all sitting empty unsold in a flat market, but the hmrc calculation could still leave you owing tax on the "gain" made while you were not living in it.

 

[Stewpot]

In addition to what people have said above:

 

1) If you rent out the new place, any tax relief will be at 20% even if you are a 40% tax payer. If you then sell it, it will be wholly subject to CGT at a higher rate of 28% applied to residential property. I'm not sure how they would assess it's initial value. I have a feeling this may not apply to a holiday let, but you will have to be able to convince HMRC that that's what it is.

 

2) If you move into it, you can sell your old place and claim the PPR exemption from CGT (provided, as has been said, you complete on the sale within nine months). If you move into the new place and let out the old, when you come to sell it, you will pay CGT pro-rata on the period it was not your PPR, So if, say, you lived in it for eight years, then let it out for two, you would pay CGT on 20% of any gain during the whole time you owned it.

 

You can mitigate the taxable amount by deducting any capital expenditure after it ceases to be your PPR. This does not include general maintenance, or replacing like for like items (which would both be deductible against any income - rent - from the property), but for example, if you add a carport where there wasn't one before, you can deduct that. But if you replace kitchen units, no matter how much more expensive the new ones are, they are not deductible (except as maintenance). You can also deduct legal and administrative costs involved in the sale, plus there is the annual exempt amount - currently around £12k, I believe.

 

The CGT manual - the one that HMRC use themselves, starts here: www.gov.uk/hmrc-internal-manuals/capital-gains-manual

 

It's not that hard a read, but you do have to stick with it, and spend the time to understand it.

 

As ever, IINAL, YMMV, Information On The Internet Isn't Worth The Paper It's Written On, and all that.

[Temp]

If you rent out the new house then I believe there is a problem with reclaiming VAT. You should seek advice on the following as it might be out of date... 

 

https://www.glovers.co.uk/news-articles307.html

 

Normally new houses are zero rated when sold so VAT paid on materials can be recovered either by you using the self build reclaim scheme or by your builder..

 

Quote

 

VAT incurred by developers in the construction of new properties is recoverable based on a developer’s intended use of the property. When the newly built property is sold or a long lease of over 21 years is granted, it is classed as a zero-rated supply. This allows the developers to recover the VAT incurred in the development costs for such properties prior to any sale or long lease being granted. 
 

 

 

But if its let then its an "exempt supply" not "zero rated". The difference is that VAT cannot be reclaimed according to...

 

Quote

 

Developers choosing to let their newly built properties are for VAT purposes making an exempt supply, under which VAT incurred in the construction cannot be recovered. This is because they are then operating as investors instead of developers. Consequently some of the VAT recovered when the developer intended to sell the property must be repaid.
 

 

 

 

Edited January 13, 2020 by Temp

[FingersAndThumbs]

Thanks all. Sounds like a complete minefield.

 

So in short - the only real tax efficient options are either to sell the plots or build, move in, and sell the old property?

 

That's my Portmeirion ambitions down the drain then!

 

Are there any implications if selling the plot to a family member? Thinking might be an opportunity to get family closer as they age.

 

 

 

 

[Stewpot]

You would really be well advised to talk it over with an accountant. Professional fees can give pause for thought, but really this would be a couple of hundred pounds well spent if you're serious - even if it means you decide against doing anything. To progress with a plan, and then find, too late that you are crushed by bad tax planning would be worse.

[Temp]

14 hours ago, FingersAndThumbs said:

Are there any implications if selling the plot to a family member? Thinking might be an opportunity to get family closer as they age.

 

That could be a good approach. If you built one for yourself and another for a relative and both of you move in and live there for three years then with care you could escape the CIL, VAT and CGT on both plots. 

 

The downside is that self building can be quite stressful and many a relationship has failed the test. 

 

 

[JessandMat]

Hi, we're in a similar position to this. We have planning permission hopefully coming for a small property in our garden - to complicate things it's a project that needs part of our garden and part of our neighbour's garden (who isn't UK resident for tax purposes).

 

We've spoken to some accountants and the general consensus seems to be to do a tax return and we won't pay tax on the land with planning permission (our plot is under half an acre and land is currently used as a garage where our bikes are stored).

 

However if we build the property ourselves it seems we would make more money, at least on paper, but it looks like we would pay income tax on the profit. I'm not working currently so have some tax allowance, my other half is a higher level tax payer. (FYI we're not married). One accountant suggested putting the land into a company but drawing dividends etc seems problematic.

 

Another option is to live in the property we build, although it's smaller than we'd like. We seem to think 3 years is the time period we need to be in it for but i'm not sure there is a specific time period. We would either retain the other property, which is being renovated at the same time and rent it out during that time. Possibly moving back in in the future. So income tax would be payable on the rental income during that time. And a portion of CGT for the period we don't live in it when we do eventually sell. (With some grace periods I think).

 

Or we could sell it when we move into the smaller new build with no CGT etc payable as it would benefit from PRR at that point. (Which would be easier as we don't have all of the cash to develop both at the same time so we may need to sell the main house to fund the new build!)

 

If we move in to the new build we should get the VAT exemption too. (We don't have CIL payable locally).

 

My question is.. have we understood this all correctly, it seems very complicated and the above doesn't address that this is all being done with a neighbour? Are there any hidden expenses like connection to water etc charges we're missing as part of the new build project that make it less attractive?

 

Also, where does the land value sit - we can't just split the plot to build on from the garden from the main house can we; somewhere in the above there will be some SDLT/CGT etc to pay, but where does it sit?

 

We do need specialist tax advice but I'm struggling to speak to someone with this sort of experience; any quotes I've had are also for a few thousand pounds which seems a lot to pay at this stage (albeit may be worth it in the long run to get the tax right!)

 

 

[Mr Punter]

Hi @JessandMat and welcome.

 

Unless you are reasonably skilled and experienced and willing to do a large amount of the work it is unlikely that you will benefit much financially by building this over and above what you would gain free of hassle by just gaining consent and selling the plot to a self builder or small developer.

 

The new property will need connection to all services and the utilities will provide quotations for these but on the basis that they are nearby you could budget £8,000 for this.

 

You may find the transaction easier if you either purchase the parcel outright from your neighbour or agree to split the sale proceeds in proportions agreed by you both.

 

I would not suggest that you and neighbour try to develop this as a joint venture.

 

You will need your lenders consent before the plot can be sold.

[JessandMat]

Thanks for this Mr Punter, that's really helpful. We could bring in family labour to do some of the work, my dad is a tradesman but doesn't live locally so wouldn't be straight forward! We're also quite handy but this sort of labour will slow it down too....

 

The figures we've done show potential profit as more than twice as much if we develop the property - the neighbour's ownership makes it more complex as we're splitting profit.  We may be underestimating how much someone will pay for the land - think we may test the market to see and that may make the decision for us! 

 

Re connections - we don't need to do this if we sell the plot do we? Have some estate agents coming round so can check with them what we need to do etc as well.

 

My mortgage broker has been really helpful so we've got an idea of how to work with the lender - although they seemingly want to know before we build (let alone sale).

 

Also spoken to a solicitor re separating the land titles and it seems this can happen once we have a seller - be that for the land plot or a built house!

 

Thanks again!

[Temp]

On 09/12/2020 at 15:08, JessandMat said:

We seem to think 3 years is the time period we need to be in it for but i'm not sure there is a specific time period. We would either retain the other property, which is being renovated at the same time and rent it out during that time. Possibly moving back in in the future.

 

Its 3 years to avoid the CIL but otherwise HMRC look at the specific circumstances. If you were to move in just for a few days or weeks they might decide it wasn't really your PPR. However if you were to live there for a bit longer and decide it was too small and then move that might be different. Your intention at the outset may matter. They may look at what you tell your lender so be careful what you say in letters and chat rooms.

 

 

[JessandMat]

Many thanks and well noted!