Principal Private Residence and Home Development

Home development

Principal Private Residence (PPR) relief was introduced to ensure a home owner could invest the net proceeds from sale, into a replacement home without suffering a tax charge. However, what if you choose to develop the family home into smaller units?

Beverly and Geoffrey have lived in their six-bedroom home for the past 35 years, the children have long since flown the nest and the property has become a burden. None of the children are interested in the property, therefore with Beverly’s engineering background; they decide to take on the project of developing the property into four individual apartments.

Our first step is to consider the level of capital gain which will not attract PPR relief. In order to calculate this, we require the value of the unconverted property prior to the development, as this will replace the original cost of the property within this calculation. Deducting this value, along with the conversion costs from the proceeds received from the four flats, we determine the capital gain generated.

Proceeds from the four flats £1,600,000

Less: MV pre-development £950,000

Less: Conversion costs £400,000

Capital Gain not covered by PPR £250,000

From their share of the capital gain, Beverly and Geoffrey deduct their annual exemptions (currently) £11,700 and as higher rate taxpayers, each taxable element is subject to 28% tax resulting in £31,724 payable by each.

What one might then consider is whether banking £1,136,552 as a result of the development instead of £950,000 was worth the effort! You never know, a developer might just offer a higher price for your home and undertake the development themselves, without resulting in a capital gain for the homeowners.