Selling house in poor condition &at loss to cowboys and CGT.

Selling house in poor condition &at loss to cowboys and CGT.

Author
Discussion

NFT

Original Poster:

1,324 posts

24 months

Sunday 19th November 2023
quotequote all
Observing a situation.

BTL landlord was adding full dormer loft conversion, side and rear extension for maximum uplift pre sale to tenant,

Works and materials so bad it's unsafe, roof needs redoing and extension foundations digging before it can be done properly.

Owners out at least 40k already, paid to seemingly untraceable cowboys.

Buyer now disinterested due to timeframe.

Property value now reduced.

Result

Owner appears to want rid asap at new lower valuation (needs cash fast), rather than have work done and sell much later. (Don't believe insurers will cover it)

Questions.

1. Can the 40k taken by cowboys be free from CGT if sells it now?

2. If he has work done and sells. can the 40k be included in total uplift work costs and be free from CGT? And would HMRC have issue thinking it's massively inflated costs.

3. Would any insurers normally cover bad works by disappearing cowboys?

Not my property etc.. Just observing plight of someone else and curious.

Cheers,






Grrbang

731 posts

73 months

Monday 20th November 2023
quotequote all
1 and 2) I have absolutely no expertise in this area, but would like to share a gut feeling (could be wrong).

If the extension devalues the property by £40k, he's already saving CGT by selling the house for less money. If he claims his £40k costs were a capital expense to further reduce his CGT bill, then it seems a bit like double-dipping.

But if his costs were £40k whereas his house was only devalued by £10k, for example, then perhaps some sort of claim for expenditure is reasonable.

3) Your friend have to read the insurer's small print as to whether bodged construction is covered, or whether it counts as 'damage' as such. If it's just that his insurer can't recover the costs from the builders, I guess your friend's insurer would just need to pay up.

Eric Mc

122,236 posts

267 months

Monday 20th November 2023
quotequote all
The cost of the refurbishment IS allowed as "enhancement expenditure" so gets added to the original cost of the property when working out what is called the "base cost".

Obviously, the sale proceeds (whatever the total turns out to be) is the sale price for CGT purposes

So, the Capital Gain is -

Sales proceeds minus original costs minus rubbish enhancement expenses costs minus legal fees etc.

NFT

Original Poster:

1,324 posts

24 months

Monday 20th November 2023
quotequote all
Eric Mc said:
The cost of the refurbishment IS allowed as "enhancement expenditure" so gets added to the original cost of the property when working out what is called the "base cost".

Obviously, the sale proceeds (whatever the total turns out to be) is the sale price for CGT purposes

So, the Capital Gain is -

Sales proceeds minus original costs minus rubbish enhancement expenses costs minus legal fees etc.
Indeed, the twist is they paid expecting an enhancement, but it has gone wrong, decreasing value due to cowboys.

I suspect if they sell for a now reduced value (close to original cost) he will pay a smaller CGT, but the 40k won't be usable to mitigate it at all.

Possible Solution?

From a business viewpoint, with its value reduced, and thus the gain he will make reduced also slashing the CGT Bill, it seems ideal time to establish a limited company to acquire it, do the work to achieve the potential enhanced value, then rent it out (able to then avoid treating mortgage fees as taxable income).

Anyone know if HMRC would develop an issue with a property dipping below expected market value and being sold/transferred to a company owned by the same person?

Could they possibly want to treat it's market value as the valuation prior to cowboys leaving it needing new roof, structural support on extension connecting walls, extension that needs knocking down, foundations redoing etc?






MustangGT

11,700 posts

282 months

Monday 20th November 2023
quotequote all
NFT said:
Indeed, the twist is they paid expecting an enhancement, but it has gone wrong, decreasing value due to cowboys.

I suspect if they sell for a now reduced value (close to original cost) he will pay a smaller CGT, but the 40k won't be usable to mitigate it at all.

Possible Solution?

From a business viewpoint, with its value reduced, and thus the gain he will make reduced also slashing the CGT Bill, it seems ideal time to establish a limited company to acquire it, do the work to achieve the potential enhanced value, then rent it out (able to then avoid treating mortgage fees as taxable income).

Anyone know if HMRC would develop an issue with a property dipping below expected market value and being sold/transferred to a company owned by the same person?

Could they possibly want to treat it's market value as the valuation prior to cowboys leaving it needing new roof, structural support on extension connecting walls, extension that needs knocking down, foundations redoing etc?
If the current valuation is close to the purchase price, add the enhancements and there will be no CGT payable as the cost will have been higher then the selling price. IIRC this could be used to reduce other CGT amounts in the same tax year.

As regards the possible solution, I understood he needed to sell it as he needed the cash??

To transfer it into a LTD the LTD would have to pay a fair market price, and (IIRC) then would be paying the standard Stamp duty plus the extra 3%. Where would the funding come from for the LTD to purchase it? Then there are all the HMRC/Companies House requirements for a property company, Income taxed as a company and then taxed personally if he takes the income out either as salary or dividends.

Eric Mc

122,236 posts

267 months

Monday 20th November 2023
quotequote all
Valuation is an irrelevance.

All that matters is the actual sale proceed achieved when the property is sold.

The rubbish "enhancements" will be automatically factored into the sale price achieved.

If the sale price achieved turns out to be less than the original purchase price plus the "enhancements" costs, then there will be a loss on disposal i.e no gain - so no Capital Gains Tax liability will arise.


NFT

Original Poster:

1,324 posts

24 months

Wednesday 22nd November 2023
quotequote all
Thanks for the informative and helpful reply's.

MustangGT said:
As regards the possible solution, I understood he needed to sell it as he needed the cash??
Indeed, he's having a bad time, don't know all details but life is going very wrong by looks of it.

Was more me observing situation and getting ideas, thinking what if I can get property dirt cheap without needing mortgage, renovate, possibly split into flats and put as much of the income into pension or other pursuits etc... while property value hopefully goes up nicely over time for me or family when I go.