Converting house to flats- tax consequences?

[gunther1]

What are the tax consequences of converting my house (PPR) into 2 flats and selling them? I am an accountant - but clearly not involved in tax (and the exams were a very long while ago...), and therefore do not work in a trade and couldn't be accused of doing this for a living (D1 exemption?)

What will happen to the mortgage secured over the house? Will i need to remortgage?

[Tax Accountant]

What are the tax consequences of converting my house (PPR) into 2 flats and selling them? I am an accountant - but clearly not involved in tax (and the exams were a very long while ago...), and therefore do not work in a trade and couldn't be accused of doing this for a living (D1 exemption?)

What will happen to the mortgage secured over the house? Will i need to remortgage?

HMR&C Help Sheet IR283 states:

''Even if you meet all the conditions, you will not get private residence relief if you acquire a dwelling-house and/or spend money on it in order to realise a gain on its disposal''.

Ramnik

[gunther1]

A gain is not my primary aim. I just want a project that is challenging and exciting.

[jeffrey]

What are the tax consequences of converting my house (PPR) into 2 flats and selling them? I am an accountant - but clearly not involved in tax (and the exams were a very long while ago...), and therefore do not work in a trade and couldn't be accused of doing this for a living (D1 exemption?)

What will happen to the mortgage secured over the house? Will i need to remortgage?

On point 2, the mortgage will prohibit you from granting leases.
You would therefore need permission from mortgagee (lender) to do that. Alternatively, you could synchronise mortgage discharge with sales by lease (ie use sale proceeds - "lease premia" - to fund mortgage debt repayment).

Obviously, capital value of property goes to each lessee. What you retain is freehold reversion, which has much less value.

[gunther1]

Jeffrey,

Thanks for your help. Is there any reason why the lendor would not grant me a lease. Does this basically mean that they would secure the mortgage over the 2 flats (or split it 50:50 over each flat) and therefore when i sold one flat, i could pay one half of the mortgage back and when I sell the next flat pay the other.

I would not want to pay the debt back immediately on sale as this would kick up a (large!) redemption premium.

Thanks,

Stef

[Tax Accountant]

A gain is not my primary aim. I just want a project that is challenging and exciting.


Not that it makes any difference, but are you sure you are not also motivated by the gain you will be making in the process?

By the way, what is the amount of gain you are likely to make in attempting this challenging and exciting project?

I am sure most sports persons take up their chosen sport simply because they find it challenging and exciting. But if in the process of doing this they also earn money, would they not be taxed on it?

You did say you are an accountant?

Ramnik

[Tax Accountant]

Jeffrey,

I would not want to pay the debt back immediately on sale as this would kick up a (large!) redemption premium.

Thanks,

Stef

Get real.

Have you heard of any lender allowing you to sell your house but still keep your mortgage because you would be kicking up a large redemption penalty?

Ramnik

[gunther1]

Ramnik,

I think you have got the wrong end of the stick a little.

a) I would not be acquiring the dwelling house purely to make a gain. Instead I would be acquiring a house that needs work, so I could live in it with my girlfriend and perhaps in time realise a gain (the way anyone else does...). I don't see how this would be different to my girlfriend and I creating 2 flats from a house (after dwelling in it for a couple of years) and living in them seperately. Whilst quoting HMR & C is useful, it is often not as black and white as the book may suggest. I was looking for legal loop holes - Tax avoidance.

b) clearly you can't sell the security for your loan. I was merely wondering whether you could port your loan into the flats...and whether the mortgage company would allow the conversion in the first place. But thanks for the 'get real' anyway.

[Tax Accountant]

Ramnik,

I think you have got the wrong end of the stick a little.

a) I would not be acquiring the dwelling house purely to make a gain. Instead I would be acquiring a house that needs work, so I could live in it with my girlfriend and perhaps in time realise a gain (the way anyone else does...). I don't see how this would be different to my girlfriend and I creating 2 flats from a house (after dwelling in it for a couple of years) and living in them seperately. Whilst quoting HMR & C is useful, it is often not as black and white as the book may suggest. I was looking for legal loop holes - Tax avoidance.



The version above seems different to me than that originally posted by you.

I will leave to others to advise you, an accountant, about ''legal loop holes - Tax avoidance'' which you are seeking on this forum.

Ramnik