If you convert your home to three separate dwellings, what would be your tax liability upon selling two of them?

[Twoddle]

This would be a daunting and somewhat risky project, but a possible way for DS and I to continue living where we are, post-separation.

What I have in mind is borrowing to undertake the conversion, then selling one property (to pay for the cost of the conversion) and letting the other one (for top-up income and as a longer term investment).

What I'm wondering is what my tax liability would be for this project - particularly upon selling the first (and, eventually, second) dwelling. I suppose it's a similar scenario to selling off a portion of your garden for development - I'm getting stuck on how Capital Gains Tax would work in this situation.

Does anyone know what kind of sums I'd be looking at? I need to know, so I can work out if this idea is viable or not.

Many thanks.

Anyone?! Either this is decidedly boring, or no one knows the answer. Bump anyway ...

Do you mean converting your house into flats?

Capital gains tax doesn't apply if you have lived in the property for a certain number of years. You would have to pay tax on any rental income though.

I have co-owned the house for just over three years.

It's a looong bungalow. Plans have been drawn up - and informally run by the planners and given a general thumbs-up by them - for taking it up a half-storey, and subdividing into three internally, to create a terrace of three chalet cottages.

I have a feeling I need to have lived here for five years ...

Thanks, Devil.

Sorry, clearly I don't actually know much about it. Quite an interesting idea though, why are you thinking of this rather than moving and how will you finance it?

no need to have lived there for 5 yrs.

If you were a client I would say no CGT on first as covered by PPR and when you sell second there will bbe a proportion of gain exempt re the time you lived in the property. (On the facts you have given)

However, you are not so my PII does not apply!!

Devil, I am thinking of doing this rather than selling because it is DS's and my home, and we love where it is, our garden, our neighbours, the walks. DS has been through a fair bit on the home front, and this would be a way to keep something relatively constant. The alternative would be to sell it as a development plot (not a good time - selling one small cottage and renting another out might be easier) and buy a home elsewhere for DS and I, and possibly one to rent.

I may be fortunate enough to own the bungalow outright, by the time DS's dad and I have resolved our finances post-separation. So my plan would be to borrow to undertake the conversion, and then to pay off this borrowing upon selling one of the three dwellings.

BCLass, if I'm reading right, you're saying there'd be no CGT on the portion of the building which would continue to be my home, but possibly some on the other two?

Thanks for posts.

Amazing! That's a really good plan, I can understand you wanting to keep your home, it is enough of an upheaval when children are involved in a divorce anyway. I really hope it works out as you want it to.

I'm hopefully going to be divorced by the end of the month, I'm fortunate in that our house was bought with my own capital so ex has no claim over it. I couldn't bear moving out I love it here.

Thanks for understanding, Devil. And I hope your housing situation works out well, too - it sounds like it will.

I know we could move, and in many ways - workload- and risk-wise, at least - it would be easier! But this plan would mean that we could ultimately stay in our home (the living end of the bungalow is the end I'd plan to stay in with DS, so downstairs at least, layout wouldn't change), with the same views out, the same fruit trees in the garden, etc - but the garden would be smaller and take less work. Yay!

Sorry not clear - baby in other hand!!

1. No CGT on portion that remains your home when eventually sold.

1. No CGT on portion you develop and sell immediately.

1. Limited CGT on part you develop and sell at a later date.

Say you sell it in 8 years - take

proceeds -
1/3 of cost (or relevant portion based on size of that part) -
costs of development
= gain

3/8 of gain exempt as you lived in it for 3 years;
Another 3/8 exempt as lived in as PPR at some point.
Remaining 2/8 may also be exempt at least in part (lettings relief) based on actual numbers.

Then deduct annual exemption (£9,500 or thereabouts) then multiply by 18% to get tax - probably not much left by this point.

hth and is not too involved!

I asked the q to a tax expert for you.

I would suggest she takes paid for professional tax advice on this one. I would be concerned firstly that she is embarking on a trade of a property developer at least with regard to one flat and possibly all 3. This could get quite messy (apart from attracting a much higher tax rate - 40% income tax vs 18% flat rateCGT) worse still there might be an argument at the end that she has made a stock transfer at market value of the one she then chooses to live in (if that's the plan) and of the one she will be renting ie she will pay tax on their market value then even though it is not being realised into cash.

There is also what used to be section 776 - have not looked up the new reference - which gives HMRC power to treat certain property developments which do not amount to a trade as liable to income tax anyway.

Sorry to appear negative but there are a lot of possible pitfalls and she needs a tax adviser to take her through it carefully to try and avoid them (and I am not even thinking at this stage of any VAT or SDLT issues which there are some!).

SDLT by the way is Stamp Duty Land Tax

Swedes - agree with you that there are some potential issues as identified, but from experience of cases with HMRC I would say she would be fine.

1. Property developing trade - if she was buying house to develop I would say there may be an issue, but she has lived there three years I think this is not a tenable argument.

1. Transfer to stock charge wrt MV

• the one she will live in - no way. It's still her PPR.
• the one she rents out - highly unlikely HMRC would succeed on this - I have never seen this argued in these circs and lots and lots of clients rent out their ex PPRs
• the one she sells - she is selling in any case so will pay tax.

In any case s106 holdover available on transfer from stock to holdover any gain till eventual sale.

3 s776 - Don't see them running this argument.

SDLT - only relevant for purchaser - Twoddle is not purchaser

VAT - Consult a VAT expert! I only do direct taxes!

Tax is rarely black and white - it's always shades of grey. And always pays to consult a qualified chartered tax adviser (CTA)

Blimey! Thanks ever so much for such comprehensive responses. I guessed it wouldn't be straightforward, but I am - maybe naively? - surprised that tax is rarely black and white. I thought that someone, somewhere, would be able to say that my tax bill - should I go ahead with this project - would definitely involve x, y and z. I'd need to be fairly (very) sure of what my tax liability would be before starting.

As for going ahead and planning something - this hasn't incurred any costs. I've done it myself, I love doing this kind of thing and am part-trained in it, and the creative side has been an absorbing outlet for me after a traumatic separation.

WRT point (1), XP and I bought the property together over three years ago, to be a family home. We thought we might radically refurbish it over time, but only as a single dwelling. The idea occurred to me earlier this year, of subdividing the property (and taking it up a dormer storey) to make a mini-terrace of three cottages.

Despite your best efforts, I'll be honest and say that some of this is still Greek to me. How would what I have in mind be a "stock transfer"? Sorry if I'm being thick, but I'm arty farty - this kind of thing doesn't make much sense to me!

The next steps, as I see it, are:

(1) Speak to a tax adviser now about the tax liability of such a project.

(2) Apply for planning permission, even if it doesn't look like I could undertake the build tax-effectively myself.

(3) When my financial situation is clear, either sell the property (ideally with planning permission) if it's obvious that I won't be able to afford the build, or seek builders' quotes.

(4) If quotes are too high, sell the property as a trio of building plots with planning permission.

(5) If quotes are reasonable, proceed with build (in liaison with, or armed with information from, a tax accountant).

Thanks so much, ladies. I'm saving this thread and will take the points you've raised to an accountant specialising in property tax.

Oh b*gger, I've just thought that I shouldn't be applying for planning permission yet - not until I have bought XP out. At the moment, it is simply a bungalow with not altogether obvious potential. I should probably keep it at that until the dwelling is 100% mine. If I have to pay XP for the conversion potential, which no one has spotted but me and which I've put all the work into figuring out, I'll be very miffed! I can still speak to a property tax accountant in the meantime though ...