Capital Gains Tax on value gained from building?

[puntloos]

Perhaps a strange question, but imagine, with a few easy to work with numbers

 

1/ Buy a crap house (say I pay 100,000) 

2/ Knock down, build nice house (say build cost 100,000)  

3/ House valued at 225,000 right after build

4/ Sell house sometime after build for 250,000

 

-> Does capital gains tax apply here? Presumably "converting" my build cost into "house value" is not a capital gain, so if I sell it for 200,000 immediately after build I would pay 0 capital gain?

-> but what if I sell immediately at 225,000 - is that 25,000 already capital gain? Or is the value I get from going through a build not taxable?

-> If the house gains value due to market movement in a few years, does that mean I have to pay CGT on the 25000 when I sell?

-> How do we separate the "value right after build" from "value the house gained by market movements"?

-> In both cases, how do I prove the build cost me the 100,000? 

 

Does anyone have documents on this, or how can I understand this process better?

[Indy]

The one rule I'm aware of is that no CGT applies if its been your residence for 2 years. If you can somehow prove that you lived on site (caravan or mobile home) while the house was being built - then you can sell and bank the gains with no taxes (I think?)

[puntloos]

2 minutes ago, Indy said:

The one rule I'm aware of is that no CGT applies if its been your residence for 2 years. If you can somehow prove that you lived on site (caravan or mobile home) while the house was being built - then you can sell and bank the gains with no taxes (I think?)

 

Can these 2 years also count after building? I haven't lived there before we are building but certainly intend to live there after... 

[Happy Valley]

Is this house your PPR (principle private residence)? 

If so then you are exempt from CGT.

 

Otherwise put simply it is your sale price less your purchase price, costs and annual allowance (currently £12300 per individual per annum). So your £250000 sale less £200000 (purchase and build costs) less your annual allowance (assuming not used elsewhere) is £37700. You can also deduct purchase and sale costs such as solicitors and agents fees so you may get this down to around £35000 of taxable gain. If the property is in joint names then two annual £12300 (current tax year) allowances can be added together.

 

Capital Gains Tax then depends on which income tax you are in but basically you pay either 20% or 28% on the taxable gain.

Edited July 21, 2022 by Happy Valley

[Russell griffiths]

Other things to think of. 

CIL Payment, if you don’t live in it then you are liable to pay the cil. 

Vat, again if it’s not your principal place of residence then you cannot claim the vat as a new build, you can claim the vat if you are building this for profit and it’s your business, but then you will pay tax on your profit. 

 

Basically if it isn’t your house for you, then you will pay a chunk of something to the tax man.  

[puntloos]

8 minutes ago, Happy Valley said:

Is this house your PPR (principle private residence)? 

If so then you are exempt from CGT.

 

We purchased the house in 2019, intending to knock down and build a good one on top of, but I've lived in a rental the entire time (sigh, time flies). So have not lived in it yet.

I intend to move in to the owned house the moment the house is built, but "today" (if I were to sell the current house and not build) I assume(?) it is not exempt. 

 

But if I were to move in after build, and then live there 2 years or more, at which point it will be my PPR I take it, and then sell it, will it be completely CGT exempt, or will we have to do fancy calculations around when it became my PPR and what gains it had while it was not my PPR etc etc?

 

8 minutes ago, Happy Valley said:

 

Otherwise put simply it is your sale price less your purchase price, costs and annual allowance (currently £12300 per individual per annum). So your £250000 sale less £200000 (purchase and build costs) less your annual allowance (assuming not used elsewhere) is £37700. You can also deduct purchase and sale costs such as solicitors and agents fees so you may get this down to around £35000 of taxable gain. If the property is in joint names then two annual £12300 (current tax year) allowances can be added together.

 

Capital Gains Tax then depends on which income tax you are in but basically you pay either 20% or 28% on the taxable gain.

 

OK so at least the build cost (investment) is exempt.

[puntloos]

2 minutes ago, Russell griffiths said:

Other things to think of. 

CIL Payment, if you don’t live in it then you are liable to pay the cil. 

Vat, again if it’s not your principal place of residence then you cannot claim the vat as a new build, you can claim the vat if you are building this for profit and it’s your business, but then you will pay tax on your profit. 

 

Basically if it isn’t your house for you, then you will pay a chunk of something to the tax man.  

To be clear though it is absolutely intended for ourselves, we've just been living in a rental because the house is.. well, livable but we have a small kid and preferred to stay in a more modern place etc.

 

So I guess a crucial question is 'when does the house become PPR' in my situation of renting-while-rebuilding.

[Happy Valley]

15 minutes ago, puntloos said:

 

We purchased the house in 2019, intending to knock down and build a good one on top of, but I've lived in a rental the entire time (sigh, time flies). So have not lived in it yet.

I intend to move in to the owned house the moment the house is built, but "today" (if I were to sell the current house and not build) I assume(?) it is not exempt. 

 

But if I were to move in after build, and then live there 2 years or more, at which point it will be my PPR I take it, and then sell it, will it be completely CGT exempt, or will we have to do fancy calculations around when it became my PPR and what gains it had while it was not my PPR etc etc?

 

 

OK so at least the build cost (investment) is exempt.

 

A property that you rent does not count as a PPR as you do not own it. PPR is relevant when you are on Land Registry title documents for more than one property.

 

I would say that as you do not appear to own another property at the same time you should be exempt. You can always call HMRC to discuss if wish to get clarity from the horses mouth. 

[Russell griffiths]

1 hour ago, puntloos said:

To be clear though it is absolutely intended for ourselves, we've just been living in a rental because the house is.. well, livable but we have a small kid and preferred to stay in a more modern place etc.

 

So I guess a crucial question is 'when does the house become PPR' in my situation of renting-while-rebuilding.

Not really, I have another house, we are building a new one to live in, if it takes me another year then that will be 5 years, this is not a problem, it’s what you do when it’s finished. 

If you move in and live there for 3 years then no problems, if you finish it and sell it you will be liable to pay the cil, as well as sorting the vat out. 

 

If its for you and your family then happy days, it doesn’t matter how long, but as soon as it looks like you did it to make a profit then tax is due in one form or another. 

[Temp]

As others have said... your Principle Private Residence (aka The house you live in) is exempt from CGT.

 

My understanding is that if you don't live in the house or there is any question then HMRC will look at your intention at the outset. If you ask the bank for a loan telling them it's a "build to sell" then HMRC may well say its liable to CGT. However if you have a valid reason to change your plans half way through then HMRC may look sympathetically on it. For example if you get offered a job 500 miles away halfway through a self build they may allow the exemption to continue. 

 

I'm not sure if the same  applies to the CIL. 

 

If you took a few years off work to do the project HMRC might say any gain was really your main source off income and tax it as income rather than Capital Gain. 

 

In case it matters.. You cannot reclaim VAT on "Build to let" like you can on most houses.

[Temp]

6 hours ago, puntloos said:

But if I were to move in after build, and then live there 2 years or more, at which point it will be my PPR I take it, and then sell it, will it be completely CGT exempt..

 

My understanding is it will be free of all CGT in the situation you describe.

 

[puntloos]

Thanks all, I think I know everything I need to but might give HMRC a call like @Happy Valleysuggests.

 

[Dreadnaught]

One subtle point of difference, @puntloos, for you to consider (and maybe ask MHRC about if you are calling them).

 

I am under the impression that the 2-years mentioned is just a useful rule-of-thumb. The real underlying principle is whether the new property being built to make a profit or not. The 2-year figure is a time interval that can often demonstrate that, at the time of building the property, there wasn't an intention to sell it to make a profit. However it is the underlying principle that matters and not the time interval as such.

 

Two examples that illustrates the point.

 

1) A self builder builds a house for themselves without any intention to sell. Life changes, such as a change in job location, mean that they sell it the moment it is finished and move with their job while making a profit. I think that it would probably be easy to convince HMRC that this was their PPR with no CGT to pay. 

 

2) A self builder builds a house, lives in it for two years and sells it for a profit. They tell HMRC that its their PPR so no CGT to pay. Self builder then does the same thing subsequently three times in a row. Would HMRC then make the case that the self builder is actually a developer building houses for profit. I think they might. Would back taxes become liable, I don't know.

Edited July 22, 2022 by Dreadnaught

[Dreadnaught]

Slightly off topic but somewhat related is the matter of the reclamation of VAT under the government's "VAT DIY Scheme".

 

If the property is deemed by HMRC to be being built for profit, I believe that the ability to reclaim VAT under the above scheme is also lost.

[puntloos]

OK so I've called HMRC, and they referred me primarily to 

https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2022#residence-provided-for-a-dependent-relative

 

The read of the guy on the phone was that I get 24 months of relief, and then any day I'm not living there is a day I pay CGT over. (as a percentage of the final sale gain)

 

So let's say I finish my build and sell immediately and everything takes 4 years, then I pay 50% less CGT over the actual gains - the build/buy cost is not included

 

I hope that @Happy Valley is right around the spirit of the thing so I might call them again, I am to blame for some of the delay but obviously covid has not been kind

 

Also I'm still somewhat unsure what my primary residence is - I can even nominate one (if I have 2), but sadly that only counts if I have lived at least a few days in there. 

 

Finally wondering if knocking down a house counts as a reset somehow, but given that a plot only still has the same rules - probably not.

[Temp]

6 hours ago, puntloos said:

OK so I've called HMRC, and they referred me primarily to 

https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2022#residence-provided-for-a-dependent-relative

 

 

 

Note the bit that says..

 

 

Quote

 

Even if you meet all of these conditions, you will not get Private Residence Relief if:

• you dispose of all or part of your garden after you have disposed of your home
• you acquire a dwelling house and/or spend money on it in order to realise a gain on its disposal

 

My reading is that this refers to your intention. If your objective is to build for profit then expect to be taxed on it. However if you set out to build a house to live in then it's likely to qualify for the tax breaks that are available subject to some condition.

 

Did you give your name your name to HMRC when you called? If so you can expect them to look more closely if you set out to build a house to live in but something happens to make you change your mind before completion.

 

Do check out the CIL rules as well. That could be much larger than a CGT bill.