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February 2016

Question

I am considering dividing our five-bedroom semi-detached house into two legally separate dwellings. I understand most of the legal requirements in terms of planning permission, building regulations etc, but my query is in relation to the taxation implications.

If I proceed and complete the physical work, what is the tax position in relation to each of the dwellings? If I continue to live in one, it would appear that this would be my principal private residence. However, in relation to the second, which would no longer be my residence, would the sale involve capital gains tax?Would the tax – or, more correctly, the gain – be calculated as a proportion of the price from the date of original purchase (1981) or from the date the new title was created? Are there any other associated tax implications?

Answer

A liability to CGT arises when the proceeds (less incidental costs of sale) are greater than the original purchase price (plus purchase costs and adjusted for inflation if purchased pre-2003). CGT is charged at a rate of 33 per cent. An individual’s principal private residence is exempt from CGT if the individual has used the house as their principal private residence throughout the period of ownership.

For the dwelling that you will continue to reside in, principal private residence relief should be available against the entire gain, if any, that arises if you eventually dispose of the property. For the dwelling that you will no longer reside in, you will be entitled to principal private residence relief only for the period of actual occupation by you as a principal private residence, ie 1981 to the date the new legal title was created.

Any period following this will be deemed to be a non-occupation, although under tax law and practice, the final 12 months of ownership are deemed occupied for the purposes of the principal private residenceexemption.

In calculating whether a chargeable gain on a future disposal arises, it will be necessary to apportion the purchase price of the original property between the separate properties now created. This apportionment should be based on a method that is just and reasonable – for example, based on the respective size of the now separate buildings by reference to floor space. Further to this, the costs incurred in splitting the property into separate dwellings should be apportioned between each property in order to record the costs, which can be taken into account in calculating any gain or loss on a future disposal.

The portion of the gain exempt under principal private residence is calculated by taking the number of complete years the house was occupied as your home (including a deemed occupancy of the last 12 months before sale) over the total number of years of ownership.

Documentary records of all costs should be retained in support of such costs in the event your CGT return is selected for audit by Revenue.

Niamh Horgan is a tax adviser with Baker Tilly Ryan Glennon.