Capital Gains on self build value increase

[puntloos]

Another CGT topic, hoping you will read along and make sure I got this roughly right:

 

Let's assume a few numbers

2019 - Poor quality House bought for 1,000,000, but we don't move in (instead in a rental plus paying mortgage yay)

2020 - Tenants while we design the house

2022 - House price currently 1,250,000 (as estimated by Zoopla)

2022 - Full knockdown & rebuild

2023 - Build finished, total cost 750,000. 

and then:

Option "surrender" -

2022: Give up on building. Sell the house at zoopla estimate, so we make 250,000 (minus rent paid, plus rent received) that gets taxed. Then we move to France.

- The 'zoopla estimate'  of our house went up 250,000 - I think that's raw capital gains. When selling in 2022 I will have to pay CGT over that 250,000

 

Option A- "build poorly, sell"

2023: We sell house immediately for 2,000,000  (so pessimistically we don't lose money but the build process didn't really add value either, and we never lived in the house). Move to a hut in Nepal, start a yak shaving business in shame.

- We pay same CGT as 'surrender'. The building process had 0 increase in our total money/asset value. We just converted money into bricks. I would say there is no "gains" but does the taxman agree?

 

Option B- "build well, sell"

2023: We sell house for 2,500,000 (because my house design is awesome, and we never lived in the house). I bundle all my buildhub posts in to a book I sell on amazon.

- If our hard work does yield more value - we sell for more than original value + cost of bricks & labour

• 2,500,000 (sell value)
• - 750,000 (build cost)
• - 1,000,000 (buy cost) 
• -> CGT paid over 750,000? (250 housing market increase, 500 value over 'brick cost' due to amazing building skills)

 

Option C "build to live" (our actual plan)

2023: We move in

2030? 2040?: We sell (let's say.. 3,000,000)

- We pay the same as case B, since the only difference is that the property also increased in value simply while we were living in it, but that's not taxed with your only house? How do we determine which price increase is due to "time elapsing" (not taxed?) and which price increase is due to "amazing building skills" (taxed?)

 

[Bitpipe]

My only experience was selling our original residence (that we moved out of and into the wreck that we eventually demolished and rebuilt) after we rented it out for 36 months as sale market was flat.

 

You get CGT relief on the % gain while it was your principal residence, I can't recall if we only paid CGT on the value between moving out and sale or if it was the whole gain from original purchase to sale. CGT does takes into account money you spend permanently improving the property (e.g. extensions but not maintenance) so your rebuild costs would be eligible. You also get to include costs of sale & purchase. There is a calculator here to do the sums.

 

https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/

 

Strictly speaking, the 0% VAT self build scheme applies to a home you live in or holiday in but not sure how HMRC determine this for a single house.

 

https://www.gov.uk/vat-building-new-home/eligibility

[Thorfun]

surely if the house is your primary residence (which I assume it is seeing as you were renting when purchased) then there is no CGT to pay regardless of which scenario you choose even if you're renting?

[joe90]

15 minutes ago, Thorfun said:

surely if the house is your primary residence (which I assume it is seeing as you were renting when purchased) then there is no CGT to pay regardless of which scenario you choose even if you're renting?

This is my understanding, capital gains tax is for “investments” I.e. second homes.

[nod]

33 minutes ago, Thorfun said:

surely if the house is your primary residence (which I assume it is seeing as you were renting when purchased) then there is no CGT to pay regardless of which scenario you choose even if you're renting?

As above 

 

no CGs to pay on primary residence 

 

I posted previously A friend of mine finished his forever home just as we started ours and decided to sell five months after selling his original home and moving in to his self build 

He was only in there nine months He made just short of 330 k No CGs to pay 

[IanR]

You must live in the house at some point, if you wish to use the Private Residence Relief. So for your "surrender" options you would need to move in while selling, in order to not pay CGT.

 

As long as you have lived in the residence at some point, you get an initial two year period where you do not have to live there, IF it's being built or undergoing renovation. And you get 9 months prior to selling, that you don't have to live there, as long as you lived in it at some point.

 

You can extend the initial 2 year period of not having to live in it, generally with an additional, 3 years max, if you write to HMRC and notify them that it is your main private residence. This nomination has to be done within 2 years of every time the combination of homes you own changes.

 

So, fairly relaxed from the rules perspective, but you have to have lived in the property at some point.

 

https://www.gov.uk/tax-sell-home/absence-from-home

 

https://www.gov.uk/tax-sell-home/nominating-a-home

 

Edited December 30, 2021 by IanR

[puntloos]

 

5 hours ago, Thorfun said:

surely if the house is your primary residence (which I assume it is seeing as you were renting when purchased) then there is no CGT to pay regardless of which scenario you choose even if you're renting?

 

This certainly is the case, we own only one home. Slight 'detail' I suppose is what you count as the home, is it the specific stack of bricks? If we knock it down is the new house a 'different home' for some tax purposes?

 

3 hours ago, IanR said:

You must live in the house at some point, if you wish to use the Private Residence Relief. So for your "surrender" options you would need to move in while selling, in order to not pay CGT.

 

Would literally living there for "1 day" (by at least moving our council tax there etc) suffice? I couldn't find a proper definition of living there.

 

3 hours ago, IanR said:

As long as you have lived in the residence at some point, you get an initial two year period where you do not have to live there, IF it's being built or undergoing renovation.

 

This is still for that 'surrender' option right? As outlined:

- Bought mid 2019, while we were in rental A

- mid 2020: moved to rental B for covid reasons. 

- Today is end 2021 so we have not lived in our property for 2.5 years. 

- Design has happened, but I assume that doesn't count as 'being built' yet?

- Actual building works would start hopefully early 2022

 

-> assuming we do go ahead, would it make financial sense for us to live in that house for "a month"? It would be a huge hassle to cancel our rental, move in, find a new rental, move out.. 

 

3 hours ago, IanR said:

And you get 9 months prior to selling, that you don't have to live there, as long as you lived in it at some point.

Good to know. Not sure we need this really, but I guess it's to make sure a house doesn't stay empty while you've moved on?

 

3 hours ago, IanR said:

You can extend the initial 2 year period of not having to live in it, generally with an additional, 3 years max, if you write to HMRC and notify them that it is your main private residence. This nomination has to be done within 2 years of every time the combination of homes you own changes.

 

Do you think we should apply for this at this point?

 

Not sure we can even apply since we haven't lived there ever for the 2.5 years we've owned it, hopefully the build will be done at the 3.5-4y mark (early 2023). 

 

3 hours ago, IanR said:

So, fairly relaxed from the rules perspective, but you have to have lived in the property at some point.

 

https://www.gov.uk/tax-sell-home/absence-from-home

 

https://www.gov.uk/tax-sell-home/nominating-a-home

 

 

Will read those!

[ProDave]

When you do submit a CGT return, you have to declare "purchase price"

 

Now when we come to the CGT on our former home, now let, that was a self build.  My best guess would be to declare the "purchase price" as the cost of the plot plus ALL the costs of building the house.  Is there any official guidance on this?

[saveasteading]

1 hour ago, ProDave said:

purchase price" as the cost of the plot plus ALL the costs of building the house.

That would count against you as presumably you have built at low cost. I would hope it was accepted to allow for your own labour as a 'cost'. if disputed perhaps a valuation of what it would have been worth at the time?

But all that assumes reasonableness and logic from HMRC which is not always the way..

[Thorfun]

2 hours ago, puntloos said:

This certainly is the case, we own only one home. Slight 'detail' I suppose is what you count as the home, is it the specific stack of bricks? If we knock it down is the new house a 'different home' for some tax purposes?

a house is a house regardless of what you do to it. if you extend it, rebuild it, redecorate it etc, as far as I know (although I am not a tax advisor!) it doesn't matter at all.

 

I also believe that you can own a primary residence and also rent another property so I don't see any reason why you cannot have the house as a primary residence and still not be living there. although other more knowledgeable people might know better.

 

I presume you're paying council tax on the property? so unless you've got a reduction for non-occupation on the council tax that seems to me to be a sure sign that it is a residence and is being 'lived in'.

 

I think maybe you should speak to your solicitor who did the conveyancing for you (assuming you're still on good terms with them) and ask them. they might say they can't give tax advice but I know that my solicitor who I've had a lifetime of dealing with would just tell me how it is.

[IanR]

2 hours ago, puntloos said:

Would literally living there for "1 day" (by at least moving our council tax there etc) suffice? I couldn't find a proper definition of living there.

 

In the HMRC guidance on CGT they state "You must have lived in your home as your only or main residence at some point while you owned it." - Pretty vague.

 

Not sure if there is case law on "duration" (worth researching), but as long as your actions are not purely for CGT avoidance, then I would think a period as short as 3 months could not be argued against (I'm not a Tax expert). If it was genuinely your main residence then you wouldn't have a rental agreement at another property, you wouldn't have a mail re-direct set up at the property, bank accounts would be registered there, you'd be registered at the local Doctors and on the electoral role as well as paying the correct Council Tax.

 

2 hours ago, puntloos said:

This is still for that 'surrender' option right? As outlined:

 

Yes, but you need to get it nominated as your main private residence and plan to live there at some point.

 

Quote

-> assuming we do go ahead, would it make financial sense for us to live in that house for "a month"? It would be a huge hassle to cancel our rental, move in, find a new rental, move out..

 

 I wouldn't be comfortable with just a month. But three months just about does it for me, 6 months would be better.

 

2 hours ago, puntloos said:

Do you think we should apply for this at this point?

 

Yes, I don't think you have anything to loose. If in the end you do not ever liver there, then you can't make use of Private Residence Relief, but if you do live there, and it takes you another couple of years, then Nominating it as your Main Private Residence will buy you the extra time.

Edited December 30, 2021 by IanR

[Marvin]

My CTA (chartered tax accountant) says you need everything going to the address including council tax and all mail for at least 6 months but best for a year if you want to avoid HMRC challenging it. Your warned.

 

Best advice is to seek advice from a CTA covering all your circumstances!

 

Good luck

 

M

Edited December 30, 2021 by Marvin

[Temp]

23 hours ago, puntloos said:

Then we move to France.

 

Does it have to be France? Belgium has zero CGT so one option would be to rent somewhere in Belgium and become resident there (get a residents card). Sell UK House and any other assets liable to CGT. File UK and Belgian tax return claiming double taxation relief.  Then after say a year move to France. You can't move back to the UK for 5 years I think. It's important not to move back into a house in the UK that you previously had a connection to or HMRC will argue you wernt really non-resident. Your intention at the outset matters. So beware making plans that betray your real intention.

Edited December 31, 2021 by Temp

[Temp]

PS There are funny rules for non-resident landlords if that's relevant.

[puntloos]

1 hour ago, Temp said:

PS There are funny rules for non-resident landlords if that's relevant.

 

I find it funny that France have a reputation for surrendering. Other than that, no plans of moving out of the UK

 

[Happy Valley]

I am unsure if this is still the case but you used to be able to nominate your PPR or Principle Private Residence to HMRC. This was of particular use for the rich who owned more than one home in the UK and usually stopped any ambiguity between the properties for tax purposes. As above actual proof that you have lived there from bills may also be required.

[Susie]

You don’t mention if you own any land with the house. I presume your figures are fictitious but if you purchased the original house with over 1.25 acres then you don’t have PRR so CGT is then due. Note that what counts as garden\grounds is best researched with a tax accountant as it depends on how the land is used eg is it farmed for profit, self sufficient home produce or extended garden. 
A good accountant will advise you but tax rules are always changing  e.g. CGT is now due 30 days after selling rather than your annual self assessment. 
Could you keep the property at a furnished holiday let, then it’s a business with no CGT and instead business asset relief. 
I would decided what you want long term then seek advice from accountant but also remember that if your plans are for in x years then tax implications can change. 
 

[Temp]

No CIL in your area?

[Temp]

If it turns out you can't sell it don't rush to rent it out or you will have to repay the VAT.

[puntloos]

5 hours ago, Susie said:

You don’t mention if you own any land with the house. I presume your figures are fictitious but if you purchased the original house with over 1.25 acres then you don’t have PRR so CGT is then due. Note that what counts as garden\grounds is best researched with a tax accountant as it depends on how the land is used eg is it farmed for profit, self sufficient home produce or extended garden. 
A good accountant will advise you but tax rules are always changing  e.g. CGT is now due 30 days after selling rather than your annual self assessment. 
Could you keep the property at a furnished holiday let, then it’s a business with no CGT and instead business asset relief. 
I would decided what you want long term then seek advice from accountant but also remember that if your plans are for in x years then tax implications can change. 
 

Thanks Suzie, yep fictitious but no, it's a normal house, detached, on a small plot (just enough for a small garden). 

No CIL over here as far as I'm aware.

 

3 hours ago, Temp said:

If it turns out you can't sell it don't rush to rent it out or you will have to repay the VAT.

 

What do you mean? If I were to build then immediately try to sell, fail, then rent..?

 

 

At the end of the day it is certainly most likely that we will build to live in the place, but its a complex calculation on how much CGT we have to pay on which parts of the (friends rate) rent we charged, actual gains due to market upswing, investment in actually building a new house.. 

 

asking an accountant will probably be the right thing to do next.

 

 

Edited December 31, 2021 by puntloos

[Temp]

2 hours ago, puntloos said:

What do you mean? If I were to build then immediately try to sell, fail, then rent..?

 

Yes. If the first transaction is a lease rather than a sale it looses its zero rating for VAT. It a quirk of the system. Its the difference between "zero rated" (for new build) and "exempt" (lease)...

 

https://www.isurv.com/info/390/features/11494/taxation_vat_costs_of_building_to_rent

 

The letting of residential property is, however, exempt from VAT. This means that VAT need not be charged on the rents, but also that letting is outside the scope of VAT so the developer cannot recover any of the VAT it incurs on the development.

 

It might pay to sell it to a relative who let's it out. The stamp duty payable would be less than the VAT. 

 

[puntloos]

1 minute ago, Temp said:

 

Yes. If the first transaction is a lease rather than a sale it looses its zero rating for VAT. It a quirk of the system. Its the difference between "zero rated" (for new build) and "exempt" (lease)...

 

https://www.isurv.com/info/390/features/11494/taxation_vat_costs_of_building_to_rent

 

Wow, thank you for pointing that out. It wasn't our plan to rent after building but could well imagine it "happened to work out that way" if I didn't know. 

1 minute ago, Temp said:

 

It might pay to sell it to a relative who let's it out. The stamp duty payable would be less than the VAT. 

 

Gotcha, but nah main plan is to live in it immediately