# How to calculate CGT on a once off build of PPR



## Saoirse (24 Sep 2014)

Hi there,
not trying to replace tax advise from a professional in this post, would just like to get an idea of how the following is calculated. I understand all about market prices at acquisitions on buying a house, indexing, ppr exemptions for periods of residence but am uncertain about how CGT is calculated when you build the house yourself.

For example

Got a site from parent 2002 - market value 20k
Got full planning in 2006
Built house in 2006 for approx 400k all in 
Market value by real estate agent for bank was 1,000k  for completed house (they were the good times alright!)

Value now 600k 

So what is my acquisition value for CGT purposes , 420k or 1,000k. 

Although it cost me 420k to build it I have actually made a market loss of 580k since the house was completed.

Any insights would be great.

p.s. don't worry I will be confirming everything with a professional later.


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## Joe_90 (24 Sep 2014)

The site was valued as you were connected so that's the cost.

The house cost you €400k to build so that's the cost for CGT.

Paper profits are irrelevant you have not in reality incurred a loss.

I'd be interested to hear their take on PPR relief in a site that was held for 4 years with no house in it?


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## mandelbrot (24 Sep 2014)

Interesting.

Well the asset being disposed of is owned since 2002.

The construction of the house on it in 2006 was enhancement expenditure.

PPR can only apply for the period for which it was occupied as PPR (plus last 12 mths).

In the absence of any concession (such as exists in relation to mortgage interest relief, I think, where a site is transferred to a first time buyer, whereby the site is accepted for MIR purposes as being the sole or main residence from date of its acquisition), then you're looking at having no PPR relief for at least 4 of the 12 years of ownership.

I don't think there is any such concession - you probably could have sold the site in 2006 having obtained PP, for a nice few quid, and if you had there'd be no question of PPR on it at that point, so no reason why it should subsequently be retrospectively applied.


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## T McGibney (25 Sep 2014)

mandelbrot said:


> Interesting.
> 
> Well the asset being disposed of is owned since 2002.
> 
> ...


Really?

OP, you need proper specialist advice here.


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## Joe_90 (25 Sep 2014)

mandelbrot said:


> Interesting.
> 
> Well the asset being disposed of is owned since 2002.
> 
> ...



That would be my take on it too.

Value of the site would appear low €20k in 2002 with no planning? Was there a concern that you would not have received planning was there outline planning.

Perhaps by trying to reduce the exposure to CAT has increased the exposure to CGT in this example.

I think everyone would agree get professional advice but do revert with their answer in your particular case.


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## mandelbrot (25 Sep 2014)

T McGibney said:


> Really?
> 
> OP, you need proper specialist advice here.



Do you disagree? I only had a quick look last night, but I couldn't see anything that would indicate otherwise - a person can only have one PPR at a time, and a greenfield site clearly isn't it unless there's a concession..?


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## Bronte (25 Sep 2014)

What's MIR Mandelbrot?  Don't understand about the enhancement either.  You are not surely saying the CGT is to be calculated on the increase from the site costs of 20K to it's current value of over 400K?


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## mandelbrot (25 Sep 2014)

Bronte said:


> What's MIR Mandelbrot?  Don't understand about the enhancement either.  You are not surely saying the CGT is to be calculated on the increase from the site costs of 20K to it's current value of over 400K?



MIR = mortgage interest relief, used it twice in the same sentence so abbreviated it the 2nd time.

Enhancement expenditure is capital expenditure on enhancing an asset, so allowed for CGT (and not for income tax).

No-one is doubting the gain, it's 180k (less expenses of sale etc).

The question is what proportion of the gain is exempt. The site with house on it is a single asset, I've never seen it treated any other way; the asset is owned for 12 years, and it would seem there's at least 4 of those 12 where it can't have been a PPR.


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## Bronte (25 Sep 2014)

Surely there is no need for a CGT exemption for the first four years as they was no house ? 

(Sorry I missed the abbreviation).

Agree that the cost is site, 20K plus building/enhancement 400 = 420. Current value is 600 leaving a gain of 180K.

Is there not some kind of exemption where you buy a site and don't build your PPR for while.


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## T McGibney (25 Sep 2014)

mandelbrot said:


> Do you disagree? I only had a quick look last night, but I couldn't see anything that would indicate otherwise - a person can only have one PPR at a time, and a greenfield site clearly isn't it unless there's a concession..?



I'd need to research this properly before coming to a definite conclusion, but while what you say is logical, it sounds odd that eg a farmer who has owned a field for 20 years before building a home on it would severely dilute their PPR exemption on the subsequent sale of their home.  

I haven't come across a situation before where house & site were differentiated for the purposes of the CGT exemption.

Its potentially very complex and that's why the OP needs someone good on the case.


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## mandelbrot (25 Sep 2014)

Yeah, the case of a farmer is what has me wondering as well... may be an anomaly that hasn't been picked up on before. The farmer will generally live in the house as his PPR throughout, and when he sells it no-one questions the full availability of PPR.

One to ponder.

+1 to the OP on getting GOOD advice.


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## Zacchaos (25 Sep 2014)

There's a UK Special Commissioners Case - Henke & another v Revenue & Custom Commissioners (2006) that deals with apportionment in the case where a site was bought long before house was built - it was very clear in the decision that apportionment on PPR should be made as others have said.

[broken link removed]
(See Part 4 of the decision)

I had it in the back of my mind that as a Revenue Concession, PPR would apply if a person completed building within 12 months of buying site - can't find it in black and white now though.

PPR relief only serves to shelter you from a gain on the house you live in.  In the case of the farmer or the OP, where were they living before he built the house?? In another house on which they would have had a gain sheltered if they sold it?


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## mandelbrot (25 Sep 2014)

Zacchaos said:


> There's a UK Special Commissioners Case - Henke & another v Revenue & Custom Commissioners (2006) that deals with apportionment in the case where a site was bought long before house was built - it was very clear in the decision that apportionment on PPR should be made as others have said.
> 
> [broken link removed]
> (See Part 4 of the decision)
> ...



Thanks for that Zacchaos.

OK, so unless there's a concession here (which would most likely be as a result of lobbying by our shy and retiring farmers) the OP is going to need to apportion the PPR relief.

I doubt there is any such concession, because we'd have heard of it if there was, and it would effectively afford people the benefit of 2 or more PPR's for an indefinite period, giving scope for avoidance.


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## Zacchaos (25 Sep 2014)

There is scope within the legislation (s604(7)) for the individual and Revenue to agree on apportionment for PPR purposes where circumstances change in relation to the dwelling house - I'm not sure if it has any application in this case.

Definitely a case where the OP should get good professional advise - and possibly one to talk to Revenue about - if we're on the right track there looks to be about 20k in CGT to pay (180k x 8/12 @ 33%).  I'd be interested to hear the outcome or if anyone had come across this before - it must be fairly common in Ireland.


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## Joe_90 (25 Sep 2014)

I'd imagine it is common but how many people actually file a Capital Gains Tax return on the sale of their house when they think that 100% PPR applies!!!


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## Bronte (26 Sep 2014)

Joe_90 said:


> I'd imagine it is common but how many people actually file a Capital Gains Tax return on the sale of their house when they think that 100% PPR applies!!!


 
I know you're an accountant and there is at least one other and a third qualified in this area. 

Is this actually possible true, that everybody who built after acquiring the site from their parents, but not within the year, is potentially liable for CGT. All the accountants and profesional bodies that teach CGT, revenue officials that work in this area as well, didn't come across this and highlight it on their website. 

Surely the PPR exemption was not designed to catch people out.


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## T McGibney (26 Sep 2014)

This sums up the highly unsatisfactory catch-22 nature of the tax system here. 

I am now 26 years working as an accountant. I live and work in a rural area. I have a particular interest in CGT. Yet I have never seen or heard of this being an issue before, although its likely to affect tens (if not hundreds) of thousands of people.

If I am ignorant of this, how is an ordinary citizen meant to anticipate and comply with it? Remember if they don't, they end up being forced to settle a large tax bill and being publicly shamed in a tax defaulters list.


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## Bronte (26 Sep 2014)

T McGibney said:


> This sums up the highly unsatisfactory catch-22 nature of the tax system here.
> 
> I am now 26 years working as an accountant. I live and work in a rural area. I have a particular interest in CGT. Yet I have never seen or heard of this being an issue before, although its likely to affect tens (if not hundreds) of thousands of people.
> 
> If I am ignorant of this, how is an ordinary citizen meant to anticipate and comply with it? Remember if they don't, they end up being forced to settle a large tax bill and being publicly shamed in a tax defaulters list.


 
We must be missing somethere here Tommy, I've filled out CGT, I slightly studied it, albeit many moons ago, and all the examples would be ye old farmer gives the son or daughter a site to built a house on, never ever recall a rule about it having to be built rapidly.  It would be very very rare indeed the house that was built on a site that was just transferred that didn't cross two tax years.


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## T McGibney (26 Sep 2014)

Bronte said:


> It would be very very rare indeed the house that was built on a site that was just transferred that didn't cross two tax years.



Not just rare, impossible. Anyone expecting to occupy a self-build house within 12 months of coming into ownership of the site, let alone turning the first sod, is a hopeless optimist.


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## mandelbrot (26 Sep 2014)

T McGibney said:


> This sums up the highly unsatisfactory catch-22 nature of the tax system here.
> 
> I am now 26 years working as an accountant. I live and work in a rural area. I have a particular interest in CGT. Yet I have never seen or heard of this being an issue before, although its likely to affect tens (if not hundreds) of thousands of people.



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!

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.


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## T McGibney (26 Sep 2014)

mandelbrot said:


> 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? 



mandelbrot said:


> 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.


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## off the ball (4 Oct 2014)

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...


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## engine10 (8 Dec 2015)

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% ?


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## Setanta12 (8 Dec 2015)

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.


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## Setanta12 (8 Dec 2015)

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.


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## Sophrosyne (8 Dec 2015)

engine10 said:


> 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.


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## engine10 (15 Jan 2016)

Sophrosyne said:


> 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.


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## Dr.Debt (15 Jan 2016)

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.


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