Are you considering renovating your house? If yes, then you must stop because our capital gain tax advisors recommend against doing so. Why? Because bulldozing your house and starting from scratch is more cost-effective and tax-efficient than renovating the existing structure.
To explain the point mentioned above, consider the following example:
John – for some reason – decided to move to London from Birmingham. He sold his house for a lump sum price of £4 million. Then, he purchased a house in London for £2.5 million while saving others for renovation purposes. He spent some 8 months there and realized that the house needed some renovations. But after holding in-depth consultations with the architects and other stakeholders, John learned that it would be better to start from scratch instead of renovating it again. But while making this decision, John is unaware of the capital gains tax consequences of the decision. So, let’s discover them.
Demolition and Creation of the Disposal
Before finding out if deemed disposal is created when John bulldozes his house, let’s find out the definition of the same.
When there is a reduction in the interest of joint or associate ventures because of reasons other than the actual disposal, such disposal is categorized as deemed disposal. Speaking in layman’s terms, the types of disposal that occur behind your back are categorized as deemed disposals.
So, let’s consider if John’s demolition of his property falls in the category of deemed disposals or not.
Section 24 (1) of HM Revenue & Customs states that
if there is an entire dissipation, destruction, loss, or extinction of an asset, then the same would be categorized as deemed disposal.
As per the law described above, John’s demolition of the property does not count as a complete or entire loss of an asset, as he does not destroy his asset (land).
However, Section 24(3) of HM Revenue & Customs states,
“a building … may be regarded as an asset separate from the land on which it is situated”.
- As per the provision described above, a deemed provision is triggered under subsection 1 with respect to the site of the building by treating the building have been sold and immediately reacquired for consideration equal to the market value of that site at the time the house is demolished. But you should take note of the following important points:
- Under Section 24 (1), a deemed disposal is only triggered when there is complete destruction or demolition of the asset because officials at HMRC take this section in literal terms. Therefore, if you want deemed disposal to be triggered, you should completely eradicate the whole structure of the asset (which, in this case, is your building), and nothing remains but the foundations.
- In some cases, the monetary or market value of the land will be more than that of the asset (building or the house) because of a considerable hike in the land value from the date of acquisition to the date of demolition.
- Again, as per the legislation, it is the owner’s prerogative to consider the building as a separate asset from the land, and it denotes a choice. John can create disposal on the demolition of a building, but the default position states that disposal has not been triggered, as you can simply add demolition costs to the enhancement expenditure. And these expenditures are deductible from the future sale of the house.
Potential Advantages of Creating Disposal
If you sell your house and it results in capital loss, then, under Section 24 (3) of the HMRC, you can accelerate loss by claiming it in the tax year of the deemed disposal.
The second benefit of triggering a deemed disposal is that a new period of ownership for Private Residence Relief is created.
However, multiple other factors are considered in such cases, and HMRC deals with each case on its own merit.
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So, if you need any help with the disposal of the property or matters related to private residence relief (PRR) or inheritance tax,hire the top tax consultants in our team to get effective tax advice. Reach out to us for a 15-Minute free consultation.