CGT on dilapidated property

juneberry

Hello - I bought a property that needed extensive work, intending to move in once renovation was complete, but circumstances changed and I never did, so I sold it after about 22 months and have ended up having to pay CGT (it was the first and only property I'd owned at the time, but that's unfortunately irrelevant for tax -never mind!). My question is about allowable expenses. 

I've read up about enhancement expenditure for cgt Vs unallowable repair costs, but I've also seen the case is different for dilapidated properties. In this case, much of what would normally be revenue expenditure becomes capital expenditure. 

I did the work shortly after acquiring it, and bought it for a low price that reflected the state. 

I've spoken to an accountant and they've said the dilapidated property rules only apply to property that was rented out. As mine never was, they've only taken a few costs from my vast renovation spreadsheet. I can't, however, find anything that backs this up. Are they right? It doesn't make sense if that was the case. 

Thanks!

soolin

If you have approached an accountant already I would follow their advice  probably better than the opinions of random strangers on an internet forum. Your accountant will have all the facts, and as they may need to submit details on your behalf they will need to feel comfortable about what is being claimed. 

poseidon1

juneberry said:

Hello - I bought a property that needed extensive work, intending to move in once renovation was complete, but circumstances changed and I never did, so I sold it after about 22 months and have ended up having to pay CGT (it was the first and only property I'd owned at the time, but that's unfortunately irrelevant for tax -never mind!). My question is about allowable expenses. 

I've read up about enhancement expenditure for cgt Vs unallowable repair costs, but I've also seen the case is different for dilapidated properties. In this case, much of what would normally be revenue expenditure becomes capital expenditure. 

I did the work shortly after acquiring it, and bought it for a low price that reflected the state. 

I've spoken to an accountant and they've said the dilapidated property rules only apply to property that was rented out. As mine never was, they've only taken a few costs from my vast renovation spreadsheet. I can't, however, find anything that backs this up. Are they right? It doesn't make sense if that was the case. 

Thanks!

Although the  article  below concerns itself primarily with what constitutes expenses deductible for future lettings of a dilapidated property, it makes important points with regard to spending that enhances future value for CGT purposes.

https://www.jrwht.co.uk/news/tax/dilapidated-property-repair-or-improvement/

Might be helpful to ascertain from your accountant whether his view on allowable capital expenditure, would be difference if your objective had been to let it rather than live it as your residence.  It seems to be a default position that spending that is not income tax deductible (from a letting perspective) may qualify as a CGT enhancement cost ( eg cost of adding an extenstion or loft conversion).

The problem with submitting a CGT computation where substantial costs are eventually disallowed by HMRC is interest accruing on underpaid tax and even potential seperate penalties if HMRC consider the return negligent.

saajan_12

Firstly hard to comment without knowing the what sort of repairs you're talking about and what the condition of the corresponding item was before. 

Secondly what's the current status - has the accountant already submitted, in which case what would your case be for refiling? You may struggle to claim anything from the accountant as its arguably a judgement call not a clear cut right / wrong. 

juneberry

soolin said:

If you have approached an accountant already I would follow their advice  probably better than the opinions of random strangers on an internet forum. 

Thanks. Obviously I will abide by their judgment ultimately, but even when employing a professional I've learned to ask plenty of questions and do my own research. I want to be as knowledgeable as possible when I talk to them.

juneberry

poseidon1 said:

it makes important points with regard to spending that enhances future value for CGT purposes.

Thank you very much for this, @poseidon1 - that's really useful. I think the key point in the article - which is mentioned in HMRC's property income manual - is "The underlying principle is that the cost of buying a property in good condition is clearly capital expenditure. Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure."
Admittedly, the property income manual is dealing with income from a property business, so technically it doesn't apply to me. But it's talking about the underlying principle, so I can't see why this wouldn't also apply in my situation. 

A house is a capital asset, regardless of how it's used. So if I buy it for less than it's otherwise worth and spend money bringing it up to market value, then that's capital expenditure.

Otherwise I fall between two stools - I don't get prr because it's not my main residence; I don't get capital gains 'relief' in the form of these expenses; it's not a second home... So what would it be otherwise?

juneberry

saajan_12 said:

Firstly hard to comment without knowing the what sort of repairs you're talking about and what the condition of the corresponding item was before. 

Secondly what's the current status - has the accountant already submitted, in which case what would your case be for refiling? You may struggle to claim anything from the accountant as its arguably a judgement call not a clear cut right / wrong. 

Thank you for this, @saajan_12 - no, they haven't submitted yet. You're right that it's ultimately whatever they're happy putting their name to, so I'm keen to put a good, clear case to them when I discuss it with them.

In terms of condition, the previous owner had let it out for many years and run it down, to the point he moved the last tenants to other accommodation months before selling. I bought it for just over half market value (based on the selling price, but I beat the street price ceiling because of the improvements and the overall finish). Renovations spanned the full range, from rewire and upgraded boiler; improving the kitchen with tiling and higher end units and remodelled into kitchen diner; tiling the bathroom when it wasn't tiled before (walls and floor) and changing the small head shower to a rainfall head; improving the living room by taking out the 1980s alcoves and uncovering an original hidden stone fireplace which required restoration; tiling the hall with Victorian-style patterned tiles where previously it had been cheap carpet; taking the stairs and landing back to wood by restoring and painting them where previously it was cheap carpet, and then general repairs (eg rebuilding the garden wall, internal doors had been kicked in and needed repairing, there was a hole in the living room ceiling) and decorating.

The accountant has allowed for only the rewire, boiler and new windows.

mybestattempt

"The underlying principle is that the cost of buying a property in good condition is clearly capital expenditure. Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure."

Admittedly, the property income manual is dealing with income from a property business, so technically it doesn't apply to me. But it's talking about the underlying principle, so I can't see why this wouldn't also apply in my situation. 

A house is a capital asset, regardless of how it's used. So if I buy it for less than it's otherwise worth and spend money bringing it up to market value, then that's capital expenditure.

That underlying principle about capital/enhancement expenditure for capital gains is contained in the legislation at S38(1)(b) Taxation of Capital Gains Act 1992.

The official guidance is here:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15180

I agree that it is definitely worth revisiting the amount of allowable expenditure with your accountant if you think the all the renovation costs were reflected in the sale price you achieved for the property.

(On the matter of penalties for negligently making an incorrect return, these apply only for the 2007/08 tax year and earlier.

For the tax years since 2008/09 where an inaccurate return is made penalties maybe charged for careless, deliberate or deliberate (and concealed) behaviour.

No penalties are charged where, despite an inaccuracy, reasonable care had been taken.)

silvercar

The accountant has allowed for only the rewire, boiler and new windows.

I would have thought all those were maintenance rather than capital improvement. The house must have had wiring, a boiler and windows before.

juneberry

mybestattempt said:

I agree that it is definitely worth revisiting the amount of allowable expenditure with your accountant if you think the all the renovation costs were reflected in the sale price you achieved for the property.

Thank you @mybestattempt - yes, I think that's key. It's the overall whole; so while eg plastering and painting might normally be revenue, they're indivisible from the rest of the work when looking at the before and after and the increase in value. 

juneberry

silvercar said:

The accountant has allowed for only the rewire, boiler and new windows.

I would have thought all those were maintenance rather than capital improvement. The house must have had wiring, a boiler and windows before.

That's a really good point, and in fact changing windows from single glazing to double is an example HMRC itself uses for revenue repair expenditure.
I can only think the accountants must have glanced at my case and used a basic division for revenue and capital eg painting is always revenue, replacing a kitchen is always revenue, adding a new boiler is capital. But surely the root of this comes back to the question: the capital asset almost doubled in capital value in 22 months, so what caused this?