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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Private residence relief: realising gain: conversion into flats - example 1

In March 2008 an individual acquired a large house for £100,000. The house was used as her only residence. In June 2012 she incurred expenditure of £50,000 to convert the house into two flats. She ceased living there when the conversion was started, and the flats were put up for sale. The flats were sold in July 2013 for £150,000 each. The Valuation Office Agency advises that the value of the unconverted house in July 2013 would have been £200,000.

The part of the gain which is excluded from relief because of the application of Section 224(3) is computed as follows.

    £
     
  Sale proceeds 300,000
less unconverted value July 2013 200,000
    100,000
less conversion costs 50,000
  Gain attributable to expenditure 50,000

The chargeable gain is £50,000 before annual exempt amount.

The gain chargeable under Section 224(3) cannot be greater than the total gain arising, and clearly is not in this example. In many cases though you will need to calculate the total gain arising to make sure.

Without the restriction under Section 224(3) the gain on the two flats would have been fully relieved. The period of residence ended in June 2008 but the subsequent period falls within the final period exemption explained at CG64985+.