How to calculate CGT on a once off build of PPR

[T McGibney]

What creates the catch-22 here is the exemption; if PPRs were subject to CGT in the same way as other property there wouldn't be any anomaly like this thread has highlighted. So that's one solution!

But there is an exemption, and it has been there for the past 26 years since I left college, and a lot longer beforehand. How have I missed all the action in the meantime?

I also think you're possibly overstating the number of people actually affected by this. It POTENTIALLY affects tens of thousands of people, but how often does the set of circumstances in the OP actually happen? Bearing in mind family land tends to stay in families and so houses on family land that was a gifted site will be less likely to be sold, and in cases where a person actually buys a site then finances would normally dictate that they get the house built ASAP.

But it's impossible to plan, design build and occupy within 12 months! And a massive ask to do so within 24 months! And this has been the case for 20 years at least, during which time hundreds of thousands of rural homes have been built.

And I don't know where you are getting this "houses on family land that was a gifted site will be less likely to be sold". There has been massive social upheaval in rural Ireland in the past 20 years and this is accelerating.

 

[off the ball]

What about having dual contracts, one for the sale of the site, and a second contract for the house.
Apportion the sale proceeds between both, on a reasonable basis, therefore ring fencing the gain on the house and getting PPR relief on the up lift on the value of the house. Then with the gain on the site, you could apportion the gain between the time it was a green field site, and the time the PPR was on it, and get PPR relief on the later part...
Might take a bit of negotiating to convince the purchaser to agree....

That's just an idea...

 

[engine10]

I'm interested to learn if there has been any clarification of the correct treatment of this situation, either by correspondence from Revenue or in practice.
It is particularly interesting to me as it also seems to bear on the common practice of building on a side site of one's existing dwelling, and then moving to the new home and selling the original.

There is a widely held perception that doing this avoids most tax as the "old" house was your PPR, and you start again with a clean sheet in the new PPR.
However if one has been resident for twenty years in the old house then you have already owned the site of the new house for twenty years when it was (or was it not?) your PPR.
If you sell the new house after ten years then is your PPR exemption 100% or 33.3% ?

 

[Setanta12]

I don't know what's so surprising about all this. Admittedly I haven't worked in tax as long as some here but this is hardly new!? I think Off the Ball could be onto something - but I recall searching unsuccessfully many years ago trying to separate Buildings from the Land it is built upon.

 

[Setanta12]

I vaguely recall all sorts of anomalies in this area from my studies e.g. better to sell the land before the house as a small element of the land (cannot recall if one acre - or sufficient acreage to enjoy the house/residence) will retain value as current use value - if the house is sold first then all the land will be development value.

 

[Sophrosyne]

I'm interested to learn if there has been any clarification of the correct treatment of this situation, either by correspondence from Revenue or in practice.

For Revenue clarification, see paragraph 3.9 of this.

 

[engine10]

For Revenue clarification, see paragraph 3.9 of this.

Thanks for the link Sophrosyne.
In stating that
"If the house is completed within a year of the date of acquisition" and occupied as PPR, This period is covered by PPR exemption.
If not completed & occupied within 12 months "The gain should be apportioned between the land and house by reference to their respective acquisition costs"
This resolves most of the debate/speculation in the thread.
It would suggest the best way to proceed would be to delay the transfer date of the land until as much as possible of Planning and Tendering were completed.

 

[Dr.Debt]

Personally, I think revenue may be willing to allow full CGT relief on the sale of the house and land based on the fact that the constructed house was occupied as the OP's PPR from the time of construction and provided that he did not own any other property between 2002 and 2006. This might not be within the letter of the law but would certainly be within the spirit of the PPR exemption.

If Revenue did not accept that basis, then the only way to resolve this is to separate out the gain/loss on the land from the gain/loss on the house itself and then to disallow 2/7 of the gain/loss on the land only. I would envisage something like this.

1. Land + house
Acquisition cost + enhancement - 420K
Current market value - 600K
Notional CGT - 180

2.Land (only)
Acquisition Cost 20K
Current market value of land - 60K (for illustration)
Notional CGT on land - 40K
2/7 of this gain,PPR exemption disallowed = 11429 (reflecting the period 2002-2006)
CGT payable 11429 X 33% = 3772 less annual CGT exemption

One other concern that I would have for the OP is the original valuation of the site at 20K !! in 2002.We're told that the value of the finished house on site in 2006 was 1 million which implies that the value of the site had increased by some 580K between 2002 and 2006. If the true value of the site was much higher than 20K in 2002, then it may follow that the current true value of the land is much much higher than my example of 60K. If so the CGT liability in 2016 will also be much higher than the illustration.