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Q&As
What will we be taxed on if we self build and sell a second home?
We have planning permission to build a house in our garden. Can we claim the VAT back on the build? Also, what will we be taxed on, as this will be our second home? Is it just the profit we make, and if so how do we value the land itself? For example, if the build is £300k and we sold it for £600k, we think the plot is worth £250k+ and so should pay CGT on £50k. Surely we could inflate the land price to avoid the CGT?
One Answer
Hi Jodie,
Assuming you are developing the land yourself, with the aim of selling it and making a profit once the development is complete, you are at risk of being deemed to be a property developer and as such:
A. The land is deemed to be part-disposal at market value when the development starts. You may qualify for private residence relief (PRR), depending on the size of the land (total area limited to 0.5 hectares) and your type and period of occupation. If you qualify for PRR in full, then the taxable gain on part-disposal would be reduced to nil. Otherwise, you would be liable for CGT when the development starts. It is important that the land is in use as part of your garden at the time of disposal. HMRC look closely at land transactions, so you would be well advised to get an independent valuation and proper tax advice!
B. As you are intending to develop the land and sell for a profit, the development will be deemed to be a trade, which is subject to income tax and national insurance, not CGT. The profit would be calculated after deducting the market value of the land in point (A) and the costs of development.
C. You’re entitled to relief if you dispose of land that you occupy as your garden or grounds, up to the permitted area, at the time of your disposal. The garden or grounds includes the buildings standing on that land. So, a building that is not part of your dwelling house can still qualify for relief if it’s within the permitted area of garden or grounds.
The garden or grounds will include any enclosed land surrounding or attached to your dwelling house and serving chiefly for ornament or recreation. However, not all land you hold with your dwelling house is treated as the garden or grounds of that residence. You’re not entitled to relief for land let or used for a business, for example, surrounding farmland. Similarly, land which at the date of disposal has been fenced or divided off from your garden for development, or has been developed or is in the course of development (for example, excavations underway for foundations, roads, services, and so on) will not qualify.
D. The tax position would be very different if you move into the second property as your main residence and sell the first property.
In terms of claiming back VAT on the build, the premise of self build VAT reclaim is that you are building your principal private residence. You can’t claim the VAT back if you plan to use the property for a business purpose. So, if you are building to sell for a profit, let it out or run a bed and breakfast, then you won’t be allowed to reclaim VAT.
I strongly advise you to also seek proper professional advice, as your specific circumstances may change the advice, and mistakes will be expensive!
Best of luck with your project plans.
Katherine Taylor (finance director, Build It)