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CGT property deductions up for debate

After HMRC challenged a claim for property enhancement capital gains tax deduction, recent meetings of the Croydon and South East London Tax Discussion Groups heard how the tax authority had accepted the claim but that refurbishment and improvement costs should be carefully identified.

July 2017 

HMRC had launched a tax enquiry into the capital gains tax computations supplied by an accountant’s client that included a claim for £100,000 of refurbishment costs incurred to improve the residential property his client had sold.

HMRC had sought to remove the claim for the enhancement expenditure as in its view the property had not been improved. Last September the TDG discussed whether the costs were capital expenditure improving the property, or whether they were eligible revenue expenditure.

Following this initial discussion the accountant had explained to HMRC that in his opinion the expenditure was eligible for CGT deduction. However he contended that if it were not so allowable then his client would consider amendment to his previous returns to claim such deduction as possible for the repair and maintenance of the property.

At a more recent TDG meeting, the accountant confirmed HMRC had accepted his original claim for the deduction. HMRC had explained that it was accepting the claim on the basis that there would be an allowable revenue deduction for the expenditure if it were a repair.

At this month’s TDG, he queried whether he would actually have been able to make a claim for the costs to be offset against the rental income as repairs or maintenance. He confirmed that the expenditure was incurred some years before the property was actually let out, and that the period was not within the past eight years. The group therefore felt that had HMRC not accepted the claims for these costs to be enhancement expenditure that it was unlikely that these costs would be accepted as revenue costs when incurred as the interval between the claim being brought and the costs incurred was too great.

However the group also felt that the Tax Tribunals would be unlikely to support HMRC’s assertion that the costs were not eligible enhancement expenses to the property and that this was the underlying reason for HMRC accepting the figures provided.

Those attending were left with the conclusion that rental expenditure on property refurbishment should be carefully reviewed to ensure that such costs are correctly identified and claimed as revenue expenditure, eligible plant and machinery and property improvements.

Each month (with the exception of July and August) the Tax Discussion Groups [TDG] in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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