Reducing UK capital gain tax on a barn conversion
This is a pretty common scenario. Typically you bought a property (eg a farmhouse) a number of years ago. As part of the conveyance there were also some ancillary buildings such as a barn, large storage sheds or even a separate cottage. Given the property price bonanza in recent years you decide to convert the barn into a nice property and sell it, hopefully at a substantial profit. In order to keep more of this large profit, looking at the options available to reduce your UK tax bill are vital. This article gives you the information you need...
This is a pretty common scenario. Typically you bought a property (eg a farmhouse) a number of years ago. As part of the conveyance there were also some ancillary buildings such as a barn, large storage sheds or even a separate cottage. Given the property price bonanza in recent years you decide to convert the barn into a nice property and sell it, hopefully at a substantial profit. In order to keep more of this large profit, looking at the options available to reduce your UK tax bill are vital.
Principal private residence relief
The first thing to consider would be whether you'd be entitled to claim principal prvate residence ('PPR') relief on a disposal of the barn.
PPR relief exempts (wholly or in part) a gain arising on the disposal of an individuals main residence.
As a building is legally part of the land on which it stands private residence relief may be obtained on the disposal of a building which is owned together with the main house if it is:
- part of the main residence , or
- within the permitted area of garden or grounds
Therefore of key importance is to first consider whether the barn would be included within the definition of 'residence'. The tax legislation applies the relief to a dwelling house so whether relief was granted or not would depend on whether the barn was part of the dwelling house.
In most cases the whole of a building in which an individual lives will be a dwelling house. But in some cases the dwelling house may be more than one building.
The Court of Appeal has however stated that no building can form part of a dwelling house with the main house unless that building is '...appurtenant to, and within the curtilage of...' the main house.
Curtilage is defined by the Shorter Oxford Dictionary as `a small court, yard, or piece of ground, attached to a dwelling house and forming one enclosure with it'. This definition has been adopted by the Courts in non-tax cases and emphasis is placed on the smallness of the area comprised in the curtilage. Buildings standing around a courtyard together with the main house will be within the curtilage of the main house.
Whether one building is within the curtilage of another will depend primarily on a close geographical relationship between them. Furthermore, because the test is to identify an integral whole, a wall or fence separating two buildings will normally be sufficient to establish that they are not within the same curtilage. Similarly, a public road will set a limit to the curtilage of a building.
Whether or not a particular building is within the curtilage of a main house is a matter of fact and degree. The building must be close to the main house and an integral part of it.
A building which is appurtenant to the main house passes with it on a conveyance without having to be specifically mentioned.
So based on this you would need to determine whether the barn was within the curtillage and appurtenant to the main house. If the barn was close to the main house and actually used as part of the residence (eg for storage etc) a disposal would be likely to be covered by PPR relief.
In any case as well as falling within the definition of a dwelling house, if a building would in any case be within the permitted area of garden or grounds it will qualify for relief regardless of whether it is part of the dwelling house. The permitted area is automatically given as garden or grounds actually used for the residence of up to 1.25 acres (0.5 hectares).
Therefore if the disposal of a barn was within the permitted area it should qualify for relief. The Revenues own internal manuals state that '...you should not raise enquiries in cases whether the total garden and grounds do not exceed the area which qualifies automatically for relief...'
However, if you were to develop the barn, this would make it more difficult to argue that the property was actually used by you as part of your residence. In addition, there is anti avoidance legislation in place such that if you incur expenditure with the intention of realising a gain on the disposal any PPR relief could be restricted.
Therefore a good option is often to dispose of the derelict barn and realise the gain free of CGT. If you were to develop it there is a risk that no PPR relief could be due, or at the least a reduced sum.
Anti avoidance
The tax legislation states that where expenditure is incurred for the purpose of realising a gain, the gain attributable to that expenditure will not qualify for PPR relief. The Revenue do apply this to the barn conversion scenario, and therefore this is a specific disadvantage of undertaking the development yourself, rather than selling the undeveloped barn to a developer.
Using your own development company
If you were keen to develop the property yourself, one option could be to transfer the barn to a company controlled by you. This would crystallise a gain on you which would be covered by PPR relief. The company would then hold the cottage with an uplifted base cost (equal to the current market value). The company would then incur the costs of development, and dispose of the property at a reduced gain. The gain realised by the company on a disposal would be taxed at 19% if under £300,000. However if you are a higher rate taxpayer, you would then be subject to income tax on the extraction of the proceeds at an effective 25%. This double charge to tax is one of the principal disadvantages of using a company for short term property development activities, particularly where the cash is to be extracted (as opposed to retained in the company for reinvestment into further property).
A more efficient option may be to transfer the derelict barn to a close family member or if security of your investment is important, a trust (but see below).
You could for example consider transferring the property to your child. On realising the gain on the eventual disposal , she would be entitled to deduct the annual exemption (currently £8,800) and if they have little other income, would pay CGT in the main at 20%.
In the past using a trust was the preferred option, however it has now lost some of its attractiveness. In particular:ul>
- if the value of the barn exceeds the nil rate band lifetime Inheritance tax at 20% would be payable, and
- if you yourself benefit from the trust or even could benefit from it then any gain would be assessed on you, rather than the trust.
Therefore a transfer to a close family member could be a good option if you're looking to minimise CGT. This would be even more attractive if they could then make it their main residence prior to a disposal (eg an adult child), as they could then sell free of CGT and arrange to route the proceeds back to you.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
WPR Tax BooksFREE DOWNLOAD - Tax Planning With Double Tax Treaties: 2022/2023
In this book we look at a variety of tax planning strategies that arise from the terms of the UK's double tax treaties. This book is updated for the 2022 changes....keep reading
FREE DOWNLOAD - Tax Planning For The Family Home: 2022/2023
For many people the family home is the most valuable asset they have. As such protecting its value will be of key importance. In this tax guide we look at the key tax planning opportunities for the family home and private residences....keep reading
FREE DOWNLOAD - Non-Resident and Offshore Tax Planning 2022/2023: How To Cut Your Tax To Zero
This brand new (December 2022) edition of our best selling offshore tax planning book tells you what you need to know to take advantage of offshore opportunities and slash your UK tax bill. It's a pretty comprehensive look at plenty of UK and offshore tax planning techniques including residence, domicile, emigration, using offshore companies and trusts, buying property overseas and much more....keep reading
FREE DOWNLOAD - Inheritance Tax Planning Handbook 2022/2023: Strategies & Tactics To Save Inheritance Tax
Inheritance tax is a particularly nasty tax as it's a tax on your capital that you've accumulated from your after tax earnings. In this book we look at some of the top ways you can legally reduce your inheritance tax liability....keep reading
FREE DOWNLOAD - Company Tax Planning Handbook 2022/2023
This book looks at a number of tax planning issues for company owners and considers both corporate and personal tax planning opportunities available. It is updated for the latest changes for 2022/2023....keep reading
FREE DOWNLOAD - Buy-To-Let Tax Planning In 2022/2023Buy-To-Let ("BTL") landlords have to consider Income Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty Land Tax on their property holdings. In this book we look at tax planning techniques that all BTL landlords can consider to reduce the amount of these taxes they pay....keep reading
FREE DOWNLOAD: The Digital Services Revolution - How You're Taxed Internationally When You Sell or Provide Services Online
This guide is essential reading for anyone providing digital or online supplies of goods and services. It looks at the international tax treatment from both an income tax/corporate perspective as well as VAT/GST....keep reading
FREE DOWNLOAD: International Tax Unlocked: How You're Taxed When You Move Overseas, Trade Overseas or Have Foreign Income
The aim of this guide is to give context to the considerations for 99% of international tax planning scenarios. Without understanding the information contained here, you will find it very difficult to apply or structure any kind of tax planning to your international transactions/assets....keep reading
