HMRC internal manual

Capital Gains Manual

Private residence relief: realising gain: conversion into flats - example 2

In July 2015 an individual acquired a house for £100,000. The house was used as his only or main residence. In September 2020 he incurred expenditure of £25,000 to convert the house into two flats. He moved into one of the flats when the conversion was completed, and put the other flat up for sale. The flat was sold leasehold in January 2021 for £135,000.


The Valuation Office Agency advises that the value of the flat retained and the freehold reversion in January 2021 was £165,000 and that the unconverted house would have been worth £225,000 in January 2021.


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


Value of flats at January 2021 300,000
unconverted value at January 2021 225,000
conversion costs 25,000


Gain apportioned to flat sold


£135,000 x £50,000         = £22,500



This is less than the total gain arising from the sale of the flat, so the chargeable gain is £22,500 before the annual exempt amount.


Without the restriction under Section 224(3) the gain on the flat sold would have been fully relieved. The period of residence ended in September 2020 but the subsequent period falls within the final period of exemption explained at CG64985+.


When the flat retained as the only or main residence is finally sold a further computation will be required as part of any gain arising on that flat may also be attributable to the conversion.