House Conversion and CGT

[twinkle99]

My partner and I (Mr A and Mr B) purchased a 2 bed house (House 1) in 1999 for £80,000
In 2003, we applied for planning permission to build a 2 storey side extension and borrowed £35,000 to build it.
In 2007, we applied for planning permission to convert the side extension into a separate dwelling (House 2) and to therefore create 2 x 2 bed houses. We used savings of £40,000 to pay for the conversion.
We are currently living in House 1 which has been our only Private Residence.
We currently have a Mortgage which is attached to House 1
We currently have 1 set of Deeds for House 1
We believe that both houses are currently worth £170,000 each
We are now considering the following options:

Option 1
Rent out House 1 and move into House 2

Option 2
Sell House 1 and move into House 2

Option 3
Sell both House 1 and House 2

Option 4
Mr A moves into House 1 and Mr B moves into House 2. Under this option, the Mortgage would be Transferred over to Mr A. Mr A would then sell House 1 and move in with Mr B.

Can anyone provide any guidance on whether a Capital Gains tax liability might exist (if any) under each option. Do we need to consider anything else i.e. Stamp Duty?, I guess we are wanting to reduce or eliminate our Tax liability but are unsure. Do we have any other options?

Thanks

[jeffrey]

Stamp Duty was abolished many years ago. Stamp Duty Land Tax rules are quitre differeent in many cases. SDLT applies to:
a. purchase price (if > £175 000); and
b. any part of V's mortgage debt assumed by P.

[twinkle99]

Thanks Jeffery

Do you know if a Captial Gains Liability would exist under each option and if so, what it might be?

Thanks

[jeffrey]

No- sorry, I don't specialise in taxation. Sit tight and some more-expert members will presumably come along!

[Telometer]

Partner (i.e. living together), or Civil Partner (i.e. you've been through the Register Office)?

[jeffrey]

Partner (i.e. living together), or Civil Partner (i.e. you've been through the Register Office)?
OR proper partners, i.e. in business and governed by the Partnership Act 1890?

[Telometer]

Or I suppose the Limited Partnerships Act 1907, or the Limited Liability Partnerships Act 2000.

[twinkle99]

We are Living together as Partners (boyfriends) but have not (yet) entered into a Civil partnership.

The Mortgage and Title Deeds are in both our names.

Thanks

[Telometer]

How large is the mortgage?

[Telometer]

Moreover, what are you trying to achieve?

As in, what is the ideal outcome. I guess you want to sell one of your two houses in the most tax-efficient method? And after that, who do you want to:

1. own the remaining house
2. have the mortgage

When you say the mortgage is attached to House 1, but then say you have only one set of deeds (i.e. apparently House 1 = House 2) , what do you mean?

[twinkle99]

Balance of Mortgage is £60,000

Although the Conversion is complete (i.e. House 1 is seperate to House 2 - in terms of seperate water, gas, electric, front door etc), the Deeds are not split. The Solicitor will need to arrange this but both Mr A and Mr B will own House 2 and the remaining Mortgage.

At this stage we are just considering our options and are looking for guidance on the most Tax efficient method.

Many Thanks

[Telometer]

the most Tax efficient method

to achieve WHAT???!!!

[Telometer]

Option 1
Rent out House 1 and move into House 2[quote]
no tax - save for on rental income obviously

[quote]Option 2
Sell House 1 and move into House 2
no tax on disposal of 1. Eventual disposal of 2 in a few years time also tax free. (compare option 3(b)

Option 3
Sell both House 1 and House 2

(a)If you sell house 1 in which you live and THEN house 2, definitely tax on disposal of 2. (b) If 2 then 1 (or both at the same time), possibly tax on disposal of 2. It is possible that the construction of house 2 is a trading transaction - or a Case VI transaction s752 et seq. ITA 2007.


Option 4
Mr A moves into House 1 and Mr B moves into House 2. Under this option, the Mortgage would be Transferred over to Mr A. Mr A would then sell House 1 and move in with Mr B.

Don't understand why this is any different from option 2.

[twinkle99]

Thanks

I think we are more likely to follow Option 2.

Under Option 2, can you please explain why there would be no Tax on disposal of House 1 if we were to move into House 2 and also why there would be no Tax on disposal of House 2 after say a few years.

[Telometer]

No tax on disposal of H1 as it has (assumed - pls confirm) been your only residence for the entirety of the time you have owned it (the last three years count thus even if you have moved into H2).

H2 is a tricky one. It is possibly all a part of H1, and thus would escape tax under the exemption discussed above... PROVIDED you sell it BEFORE H1. If you sell H1 first (in option 3), the rump bit H2 is not a part of H1, so the exemption cannot apply.

If you sell off H2 whilst continuing to live in H1, there is an argument that you are a property developer, and that this is a sequence of events entered into with the purpose of making a profit. So arguably taxable. Probably not, as this is a one-off transaction, but I guess you might fancy repeating this trick in a few years time??!

Whereas, if you move into H2, and live there for some years, say three or four, that argument that it is a taxable transaction becomes very weak.

[twinkle99]

Yes, H1 has been our only residence for the entirety of the time we have owned it.

Sorry, I am still alittle confused

*******************

Post 15/07/09

Option 2
Sell House 1 and move into House 2

"no tax on disposal of 1. Eventual disposal of 2 in a few years time also tax free".

Post 16/07/09

"H2 is a tricky one. It is possibly all a part of H1, and thus would escape tax under the exemption discussed above... PROVIDED you sell it BEFORE H1. If you sell H1 first (in option 3), the rump bit H2 is not a part of H1, so the exemption cannot apply".

********************

Do you mean PROVIDED you sell it after H1 as you also said in your post 15/07/09:

"(b) If 2 then 1 (or both at the same time), possibly tax on disposal of 2"

[jeffrey]

twinkle99: your post leaves us confused! What are you quoting and what are you answering?

[Telometer]

If you have half a brain, and read the thread in its entirety you have all the answers to all the damn fool questions you have illiterately asked thus far. I'm getting quite bored with your whining.

Option (2) is not the same as (3b).