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Capital gains tax on property conversion?

Tax | Capital Gains Tax Helpful? 3

Asked by philly99, submitted 05 September 2012.

Open Quote I recently purchased an old pub which I am converting into a residential property and it is now my main (and only) residence.The pub consists of a main building with an attached restaurant to the side of it and my original intention was to the convert the pub into a 5 bedroom house with the restaurant part being a large 'lounge' area, however I decided to apply for planning permission to convert the restaurant part into a three bedroom semi-detached house (which I now have) and my question is this:-

1. Will I be liable for cgt on the restaurant part if I sell it as a 'renovation project' i,e sold the restaraunt as it stands with planning permission?

2. Will I be liable for cgt on the restaurant part if I convert it myself and sell it as a three bedroom house?

Thanks in advance.
End Quote

Answered by Justin on 26 September 2012

They key will be whether HMRC allows you to claim private residence relief on the sale. It's not normally granted if you "acquire a dwelling house and/or spend money on it in order to realise a gain on its disposal".

In other words, if HMRC thinks you bought the pub in order to develop part of it and sell on for a quick profit, it'll likely treat any resulting gains as taxable (possibly as income if it reats you as a developer). Even if you just sell the restaurant area with planning permission, rather than developing yourself, you may still be caught by this rule.

Of course, during the property boom loads of people effectively became property developers by buying homes, living there for a short while (as a main residence) while they did them up then selling at a profit and moving another notch or two up the housing ladder without paying any tax on the gains. Should they have paid tax? It's something of a grey area.

Bottom line, the answer to your question is probably subjective and I'm afraid I don't have enough experience in this area to give a more definite answer. I'd suggest seeking guidance from an accountant or HMRC directly (who can occasionally be helpful when you phone them).

Good luck.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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