HMRC charge CGT on delayed new build

[Temp]

Story in today's Times reports someone bought a new house off plan in 2004 but the house wasn't built until 2010. They moved in and sold it two years later.

 

HMRC has hit them for CGT on the gain during the 6 years when it wasn't and couldn't be their PPR because it hadn't been built yet.

 

Any self builder taking a long time to finish their house and move in could also be liable.

Edited December 8, 2018 by Temp

[Onoff]

Just now, Temp said:

Story in today's Times reports someone bought a new house off plan in 2004 but the house wasn't built until 2010. They moved in and sold it two years later.

 

HMRC has hit them for CGT on the gain during the 6 years when it wasn't their PPR because it hadn't been built yet.

 

Any self builder taking a long time to finish their house and move in could also be liable.

 

Does that go for bathrooms too? 

[newhome]

1 minute ago, Onoff said:

 

Does that go for bathrooms too? 

 

There is no tax on smelling 

 

 

[Jeremy Harris]

TBH, this doesn't surprise me.  I was warned (albeit with inaccurate information) about the HMRC tightening up on CGT three or four years ago.  I think that there has been a general push over the last few years to try and increase the amount of tax due, but that isn't paid, and this may be a consequence of that.

[MikeSharp01]

One wonders, knowing the answer in the back of ones mind, if CGT is reversible, in the sense that recent falls in house values allow you to claim -ve CGT. I doubt they would go for it.

[ProDave]

15 minutes ago, MikeSharp01 said:

One wonders, knowing the answer in the back of ones mind, if CGT is reversible, in the sense that recent falls in house values allow you to claim -ve CGT. I doubt they would go for it.

CGT is charged on the simple sum, purchase price and sale price. They then assume a linear gain over that time, it is no good arguing it went up in the first x years and then down  in the last y years.

 

There are indeed some nasty changes to PRR due in April 2020.  At the moment PRR apples to the time the house is your primary residence and the last 18 months of ownership, that reduces in 2020 to just the last 9 months of ownership.  Also in 2020 letting relief ends. Currently in most cases that will reduce any CGT to nil on a house that was previously your main residence and was then let.

 

I would think this situation would not bother a self builder like  me taking a long time to build as for most of the time the plot has been my primary residence, though in  the caravan not the house. 

 

[newhome]

How is CGT assessed if you move from one house into a second property that you own? So for example you buy a second home for 300k that you use as a holiday cottage for 10 years. At that time you retire and decide to make it your permanent home so you sell your primary residence and move into the cottage that is now worth 500k. You then live in the cottage for 5 more years and the cottage is worth 600k at that point when you sell it. What is payable then? It's gone up from 300k to 600k since you bought it but 100k of that was when it was your primary residence. Are you supposed to pay CGT on the 200k when it wasn't your primary residence (excluding deductions for the tax free allowance and fees etc)? 

 

Using a similar scenario for a self build. Say you bought a plot of land for 100k and decided to carry on living in your existing house until the build was complete (or pretty much). 3 years later you move to the new house that is worth 500k then but it had cost 400k to build, so an increase of 100k. So that CGT liability of 100k carries forward to when you sell the new property? Tough gig - especially if you've done much of the work yourself thus saving £££s. 

 

Here is HMRC's internal manual that implies that there is a 12 month grace period for a house being built:

 

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65003

 

Or possibly up to 24 months:

 

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65009

 

[newhome]

1 hour ago, MikeSharp01 said:

One wonders, knowing the answer in the back of ones mind, if CGT is reversible, in the sense that recent falls in house values allow you to claim -ve CGT. I doubt they would go for it.

 

If you make a loss on one house where CGT should be payable you can offset that against CGT for another property that you have to pay CGT on in the future I believe.

. 

 

[Jeremy Harris]

I'd like to know the answer to the holiday home question, too, as we're going to inherit a half share in one (not by choice). 

[ragg987]

I believe the rules are changing here, but when we sold our second home, the gain between purchase price and sale price was reduced by the proportion of time we lived in the house as our primary home. Plus two years. The reduced gain was then subject to CGT allowances and rates.

[ProDave]

CGT is normally declared on your tax return, e.g when we sold our former buy to let properties (that had never been our own home) you declare the gain on the land and property section of the tax return.  By only selling one in each tax year, and they were jointly owned so 2 lots of CGT allowance applied, the amount of CGT actually payable was quite small.

 

If you sell your private residence that has always been so I don't believe there is any need to declare it, but when we eventually sell our previous house that is now let, I am expecting to have to declare the sums on our tax returns that may or (hopefully) may not result in any CGT actually payable.

 

I didn't think a capital loss could be carried forward to next year. If you make a gain on one transaction and a loss on another in the same tax year, the loss making one should reduce the tax payable on the gain, but I thought that only applied if both happened in the same tax year.

[ProDave]

14 minutes ago, ragg987 said:

I believe the rules are changing here, but when we sold our second home, the gain between purchase price and sale price was reduced by the proportion of time we lived in the house as our primary home. Plus two years. The reduced gain was then subject to CGT allowances and rates.

Yes they work out the total gain and then the period you lived in it, plus the last 18 months (regardless of use)is exempt. That 18 months reduces to 9 months in April 2020.  

[newhome]

21 minutes ago, ProDave said:

I didn't think a capital loss could be carried forward to next year. If you make a gain on one transaction and a loss on another in the same tax year, the loss making one should reduce the tax payable on the gain, but I thought that only applied if both happened in the same tax year.

 

I believe that you can carry it forward subject to HMRC's rules:

 

https://www.gov.uk/capital-gains-tax/losses

 

[recoveringbuilder]

What will happen in this scenario then; our last house when built was valued at 450k , it had with it the garden ground plus another acre of land. When we sold it 8 years later we only got £320k but we kept the acre of land and now have pp for two bungalows on it, the 320 was used to pay off small mortgage and buy the cottage so our principal residence, we are now selling the plots valued at 85k each although I doubt we’ll get that , so the question is will we be liable for cgt on the plot money?

[newhome]

For reference the full details of the case referred to above are here. The purchaser paid a reservation deposit in 2004 for the right to secure a lease on an apartment in London. Towards the end of 2006 he entered into a contract for the lease. The appartment did not exist at the point - it was a space in a tower that was part of St Pancras Station Hotel that was disused. The purchase price was 575k. The progress of the work was impacted by the credit crunch and work on the appartment did not start until Nov 2009. The buyer was not allowed access to the building at all until December 2009 when the work commenced. Legal completion was on 5th Jan 2010 when the buyer moved in. He then sold the apartment on 5 Jan 2012 exactly 2 years later. The buyer sold his former property in 2007 and between then and the date that he occupied the new appartment he stayed in temporary accommodation none of which was determined to be a principal private residence so he maintained that the new apartment was his PPR and thus capital gains tax was not applicable. Initially the First Tier Tribunal decided that the period of ownership could only begin when the buyer was legally entitled to occupy the building which is when it became his PPR and thus CGT was not payable. 

 

http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j9695/TC05724.pdf

 

But then HMRC appealed to the Upper Tribunal and that decision was overturned. The findings of the Upper Tribunal were that the buyer had a legal right to dispose of the property by way of a sub sale from March 2007 when the second deposit was paid and had he done so a capital gain would have been made without any question of PPR. The Upper Tribunal concluded that the period of ownership commenced from the date of exchange in March 2007 and at that time the property could not qualify as the buyer’s main residence for PRR purposes as it wasn't able to be occupied. Thus CGT of 61k was payable (his total gain was 640k). 

 

https://www.bailii.org/uk/cases/UKUT/TCC/2018/280.pdf

 

I imagine that this could have implications for self builders who buy a plot of land well in advance of any work taking place. There is a 12 month grace period that allows a house to be built that can be extended to 2 years in 'exceptional' cases but that still isn't long in the great scheme of things. So if you buy a plot to build your dream home later this could be something to take advice on. And if you maintain your current home whilst that new house is being built you had better ensure that it is complete in 2 years (you may have to apply for the additional 12 months 'exception' period from HMRC as ordinarily it's 12 months) otherwise you may find yourself liable for CGT when you come to sell. It's not clear from this whether you can get round this by living on the site for an extended period as it is not clear whether it is the plot itself that is judged to be the PPR or the specific house that is being built on the plot. 

 

[Oz07]

What's the issue here then that the gain was made when not his ppr in Hmrc view?

[newhome]

21 hours ago, Christine Walker said:

What will happen in this scenario then; our last house when built was valued at 450k , it had with it the garden ground plus another acre of land. When we sold it 8 years later we only got £320k but we kept the acre of land and now have pp for two bungalows on it, the 320 was used to pay off small mortgage and buy the cottage so our principal residence, we are now selling the plots valued at 85k each although I doubt we’ll get that , so the question is will we be liable for cgt on the plot money?

 

I think you will need to consult a professional TBH. I'm clearly no expert so this is just my personal view from reading the various regulations.

 

Had you sold both plots before or at the same time as you sold the main house I think you should have been exempt from any CGT as it was your PPR (slight question mark over this however as I imagine the entire plot was over 0.5 hectares that seems to be the exemption limit that HMRC deems to be appropriate in most cases unless you can demonstrate that additional land was needed to enjoy the house). In order to ascertain whether you actually made a loss on the sale you would have needed to have the 2 plots valued at the same time as the house was sold. This is what would have needed to happen had the property in question been a second home or an investment and thus there was a liability for CGT. However, as this was your PPR the fact that you may have made a loss on the sale is irrelevant because the PPR rules exempt a property disposal from being judged to be a capital gain. Therefore when a loss arises on a PPR disposal in the same way that you are not liable for CGT it cannot be used as an allowable loss either. 

 

So what happens when you come to sell now? Well both your plots will be liable for CGT and CGT will be due on the increase of the land from the point that the property was no longer your PPR (one assumes that this was the date of sale). So you will need to calculate the increase in price and pay CGT on that if over the tax free allowance of £11,700 (in 2018/19). You can also offset the costs of selling the land (legal costs etc) and the cost of obtaining planning permission. Anything left over is taxed at 18% for a standard rate tax payer and 28% for a higher rate tax payer. 

 

So unless the price of the plots increases a lot from the point that you sold your house you may not have to pay any CGT but it may be worth disposing of the plots in separate tax years to take advantage of the tax free allowance, but be mindful that this allowance is used for other assets being sold such as shares, not just property being sold. If the plots are jointly owned you may be able to offset both your tax free allowances. 

 

Not a straightforward scenario so don't take my word for it, you will need to take advice and presumably complete a tax return whether you need to physically pay any CGT after allowances are deducted or not. 

 

 

[newhome]

9 minutes ago, Oz07 said:

What's the issue here then that the gain was made when not his ppr in Hmrc view?

 

Yes, a large part of the gain was made when it was not his PPR. So the period when he was legally entitled to sell the property (in 2007) even though the conversion works hadn't started then, up until the point he was physically able to occupy the property when it was finished in 2010. 

 

[Oz07]

So if someone applies for planning for additional dwelling/dwellings in garden of their ppr what would be following scenarios

 

Application submitted and approved, land then sold before occupation 

 

application submitted and approved before occupation. Land sold after occupation. 

 

Application submitted before occupation. Approval granted and plot/plots sold after occupation 

 

[newhome]

1 hour ago, Oz07 said:

So if someone applies for planning for additional dwelling/dwellings in garden of their ppr what would be following scenarios

 

This ruling doesn’t really change any of those scenarios afaik. There are already rules around selling off a garden plot. I don’t think when you put the application in makes much difference tbh. It’s whether it qualifies as your PPR when it is sold that’s important.

 

https://www.taxation.co.uk/Articles/2017/11/28/337311/main-residence-relief-and-gardens

 

This ruling determined that ownership was on exchange of contracts whereas it couldn’t become a PPR until it could be occupied on completion. Now clearly many houses exchange before completion but we are talking nearly 3 years here and the house was only occupied by the buyer for 2 years so no doubt he came to the attention of HMRC. Given the date of sale (2 years to the day since he moved in you do have to wonder if he thought 2 years would ‘save’ him). It does need some thought however if self builders are going to purchase a plot for a self build. Given this ruling it may be prudent to move to the plot (or finished house) within 2 years of purchase to avoid this scenario. There hasn’t been a test case with a self builder however, but I doubt if there could be a distinction between self build and developer build. 

 

 

[Oz07]

So if planning was submitted and approved before occupation, then plot was sold off after homeowner had moved it you reckon Hmrc would not be of the opinion that property was "developed" (by uplift in planning value) while not ppr. Just playing devils advocate

[newhome]

21 minutes ago, Oz07 said:

So if planning was submitted and approved before occupation, then plot was sold off after homeowner had moved it you reckon Hmrc would not be of the opinion that property was "developed" (by uplift in planning value) while not ppr. Just playing devils advocate

 

So you would own the property / plot before you made it your PPR in which case yes you would need to pay CGT I imagine as it wasn’t your PPR for the entire period of ownership so CGT would be due for the period before occupation. Or did you mean something different?