Best Way to Split House into 2 flats, tax implications etc
Discussion
Thought I'd copy this over to the finance section from the homes one as this is probably more likely to generate responses here. I will of course seek independent tax advice but thought I’d throw the idea around here as there are some experienced heads around the place and it may help someone else too.
I’m about to complete on an 1850s 2.5 up 2.5 down terrace with a flat roof. Most of the houses in the terrace have been converted into flats with the house next door to the one I’m buying having earlier this year done a mansard roof with 2 bedrooms and a bathroom up there, and a small rear extension to make two decent sized 2 bed flats, both with a large private garden space.
The idea that we have had is to basically mirror what has been done next door, with the work to start in 18 months time (small matter of a wedding to get out of the way first).
This is in no way a forever home for us, more of a stop-gap having just moved out of a house which we completely revamped. The ultimate plan is to either build our own place or find a project house/barn to create a long term place, so I need to be able to release the money from the two flats in order to be able to be a cash buyer on the next place, or to have cash in hand for building work. I just need to work out the best way to go about it.
I’ve budgeted £100k for the work, I would hope it would actually be more like £70k but have over-estimated everything just to give a bit of wiggle room. If we were to stick to the £100k then the position, notwithstanding changes to the property market should be:
Mortgage £350k.
Flat A Value £375k
Flat B Value £375k
Would we be best to
1. Sell both which would presumably make us liable for CGT on at least one of them
2. Rent one out mortgage free and live in the other one under a residential mortgage (and if so do we live in the “new” flat for CGT purposes)
3. Rent both out, leave 25% in each flat?
Not massively keen on being a landlord, albeit if its on a flat that we know well and have built ourselves then it should minimise issues you would hope.
Also, as we are creating a "new build", is there a separate tax area for me to look at?
This will have a bearing on the spec of the plans that we have drawn up so thought it’s best to start thinking about these things now. Alternatively if its not worth bothering with then we can just draw up the mansard plans and keep as one property.
Cheers,
Iain
I’m about to complete on an 1850s 2.5 up 2.5 down terrace with a flat roof. Most of the houses in the terrace have been converted into flats with the house next door to the one I’m buying having earlier this year done a mansard roof with 2 bedrooms and a bathroom up there, and a small rear extension to make two decent sized 2 bed flats, both with a large private garden space.
The idea that we have had is to basically mirror what has been done next door, with the work to start in 18 months time (small matter of a wedding to get out of the way first).
This is in no way a forever home for us, more of a stop-gap having just moved out of a house which we completely revamped. The ultimate plan is to either build our own place or find a project house/barn to create a long term place, so I need to be able to release the money from the two flats in order to be able to be a cash buyer on the next place, or to have cash in hand for building work. I just need to work out the best way to go about it.
I’ve budgeted £100k for the work, I would hope it would actually be more like £70k but have over-estimated everything just to give a bit of wiggle room. If we were to stick to the £100k then the position, notwithstanding changes to the property market should be:
Mortgage £350k.
Flat A Value £375k
Flat B Value £375k
Would we be best to
1. Sell both which would presumably make us liable for CGT on at least one of them
2. Rent one out mortgage free and live in the other one under a residential mortgage (and if so do we live in the “new” flat for CGT purposes)
3. Rent both out, leave 25% in each flat?
Not massively keen on being a landlord, albeit if its on a flat that we know well and have built ourselves then it should minimise issues you would hope.
Also, as we are creating a "new build", is there a separate tax area for me to look at?
This will have a bearing on the spec of the plans that we have drawn up so thought it’s best to start thinking about these things now. Alternatively if its not worth bothering with then we can just draw up the mansard plans and keep as one property.
Cheers,
Iain
I am reasonably optimistic on planning although will not take anything for granted.
The Council have stated that there is a need for flats in the area and they have been quite loose with allowing conversions. It's very close to a tube stop, meets the space recommendations and will have off street parking and outdoor space for each flat. I'll use the same architect that got the plans through for next door 18 months ago.
The reason is hasn't been done so far is likely that the current family living there just don't have the appetite for it, they have 2 small children who have clearly taken over the house, I think even just a basic extension would have been a lot of upheaval for them.
Of the run of 6 terraces, 3 are maisonettes and 3 are still houses. I'm pretty certain if I spent 100k renovating and extending I'd hit the ceiling price for a terraced house in the area, but the market for 2 bed flats is quite strong.
Appreciate that I'd be caught between CGT and Income Tax either way, I'm trying to get my head round which is the smartest way to go about doing this, or if there is something that I'm missing.
Wife is presently a low rate taxpayer, I'm in the 40% bracket.
The Council have stated that there is a need for flats in the area and they have been quite loose with allowing conversions. It's very close to a tube stop, meets the space recommendations and will have off street parking and outdoor space for each flat. I'll use the same architect that got the plans through for next door 18 months ago.
The reason is hasn't been done so far is likely that the current family living there just don't have the appetite for it, they have 2 small children who have clearly taken over the house, I think even just a basic extension would have been a lot of upheaval for them.
Of the run of 6 terraces, 3 are maisonettes and 3 are still houses. I'm pretty certain if I spent 100k renovating and extending I'd hit the ceiling price for a terraced house in the area, but the market for 2 bed flats is quite strong.
Appreciate that I'd be caught between CGT and Income Tax either way, I'm trying to get my head round which is the smartest way to go about doing this, or if there is something that I'm missing.
Wife is presently a low rate taxpayer, I'm in the 40% bracket.
Being married is of no significance UNLESS one of you dies - at which point it can have a massive ramification regarding Inheritance Tax.
At the moment, all profits from the rental property would be split 50/50 between the two owners and each would pay their respective tax liability arising based on their own personal tax situation.
If the property was disposed of, the gain on disposal would also be split 50/50 and each individual would pay their share of the Capital Gains Tax liability arising.
At the moment, all profits from the rental property would be split 50/50 between the two owners and each would pay their respective tax liability arising based on their own personal tax situation.
If the property was disposed of, the gain on disposal would also be split 50/50 and each individual would pay their share of the Capital Gains Tax liability arising.
Delay the marriage!
Have one flat as your primary residence, one flat as your mrs' primary residence. Sell them both to buy a new place together, pay no capital gains tax, then get hitched!
Alternative is to get hitched, sell one flat as primary residence, the other would attract capital gains as selling a second home.
Disclaimer. I don't know what I'm talking about and this is probably wrong.
Have one flat as your primary residence, one flat as your mrs' primary residence. Sell them both to buy a new place together, pay no capital gains tax, then get hitched!
Alternative is to get hitched, sell one flat as primary residence, the other would attract capital gains as selling a second home.
Disclaimer. I don't know what I'm talking about and this is probably wrong.
"Main Residence" status for a property must be supported by documentary evidence that the individual really is or has lived or there or fully intended to live there.
Merely stating that a property is a Main Residence is not enough.
There are plenty of tax cases where a Main Residency claim has failed because it could not be supported by evidence.
Merely stating that a property is a Main Residence is not enough.
There are plenty of tax cases where a Main Residency claim has failed because it could not be supported by evidence.
I guess this is kind of where I'm coming from. I own number 42 and will have lived in it for 2 years before the "new" number 42a is completed
To my mind I'd be best selling number 42 as it has been my main and only residence for 2 years and should attract no GCT and either moving in to 42a for a few years (would I have to pay stamp duty??), or taking out a 70% mortgage on it and renting it out.
Is this sound thinking though?
Ultimate aim being to get enough cash out at the end that we can be cash rich which would open up the prospect of buying an old barn or some land for building on
To my mind I'd be best selling number 42 as it has been my main and only residence for 2 years and should attract no GCT and either moving in to 42a for a few years (would I have to pay stamp duty??), or taking out a 70% mortgage on it and renting it out.
Is this sound thinking though?
Ultimate aim being to get enough cash out at the end that we can be cash rich which would open up the prospect of buying an old barn or some land for building on
If one property has been your main residence all the time you own it, it will be eligible for Main Residence relief up to the point it stopped being your Main Residence. So, No 42 would qualify on that score.
No.42 can only be your Main Residence if you physically move into it at which point 42 ceases being your MR and 42A commences being your MR.
No.42 can only be your Main Residence if you physically move into it at which point 42 ceases being your MR and 42A commences being your MR.
Eric Mc said:
If one property has been your main residence all the time you own it, it will be eligible for Main Residence relief up to the point it stopped being your Main Residence. So, No 42 would qualify on that score.
No.42 can only be your Main Residence if you physically move into it at which point 42 ceases being your MR and 42A commences being your MR.
He can make an election under S222 for either to be treated as his main residence (if he’s resided in both). No.42 can only be your Main Residence if you physically move into it at which point 42 ceases being your MR and 42A commences being your MR.
Thanks chaps. So the upshot is that I should be doing number 42 up as a flat to sell onwards so will make it a blank canvas but slightly higher spec than a rental property would be, and then keep my options open with the other one.
If we do buy another wreck or a plot as the next place then I'll need somewhere to live whilst the work is being done, so maybe living in 42a for a year or so wouldn't be a bad idea for a few reasons.
Is there anything I've missed with the plan?
If we do buy another wreck or a plot as the next place then I'll need somewhere to live whilst the work is being done, so maybe living in 42a for a year or so wouldn't be a bad idea for a few reasons.
Is there anything I've missed with the plan?
iain014 said:
Thanks chaps. So the upshot is that I should be doing number 42 up as a flat to sell onwards so will make it a blank canvas but slightly higher spec than a rental property would be, and then keep my options open with the other one.
If we do buy another wreck or a plot as the next place then I'll need somewhere to live whilst the work is being done, so maybe living in 42a for a year or so wouldn't be a bad idea for a few reasons.
Is there anything I've missed with the plan?
Whichever you make as your PPR;If we do buy another wreck or a plot as the next place then I'll need somewhere to live whilst the work is being done, so maybe living in 42a for a year or so wouldn't be a bad idea for a few reasons.
Is there anything I've missed with the plan?
- you need to have resided in it.
- you can elect whichever residence you want to be your ppr.
- anything which isn’t your ppr, is then subject to cgt, it’s not a free lunch!, subject to;
- some periods are deemed to qualify anyway, eg, the last 18 months, which will become 9 months next year.
The last 18 months is an overlap period, which would allow some planning. Eg, make the other place your PPR during the last 18 months before sale of the old place, and you’ll get the last 18 months anyway, and cover up to 18 months’ gains on the new property. Hope that makes sense.
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