Dilapidations receipt- CGT or SchA?

Dilapidations receipt- CGT or SchA?

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Lease comes to an end-landlord-assumed higher rate taxpayer- serves dilapidation notice , and after negotiation tenant pays landlord in lieu of carrying out dilaps.

If payment is after lease terminates, it is in lieu of the repairs required under the lease-so it is compensation to the landlord for the dimunition in the value of the landlord's interest-his property is not as good as the one he originally let.

That seems to be a capital receipt, whether or not the landlord subsequently carries out the repairs .
So if landlord is an individual and has held the property since before 17th(?)March 1998, his rate of CGT on the dilapidation receipt will be 26% maximum.

Whether or not he has received such a payment, he would still be entitled to claim a deduction for the actual repairs he has to undertake under 'Sch A' rules, enjoying relief at 40%.

The simple approach of offsetting one against the other seems to have no basis in law or logic, as they are receipts and payments for quite different matters--or is that too optimistic an analysis ?
Hopefu 2

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By wdr
09th Oct 2006 16:02

The nRevenue seem to assert, on a spurious basis, that the recei
The Revenue Manuals text is set out below, but ignores the legal and factual basis which the questioner has set out. The 'to fill in a hole in profits' argumment ' has to be nonsense. If the owner is a trust, the payment for dilapidations is not the income of the life tenant, for example. Note the uncertainty about what the Inspector is to do if the taxpayer claims CGT treatment!!
PROPERTY INCOME MANUAL para 2020
'The landlord of a property let on a tenants repairing lease usually inspects the property before the lease is due to expire and may send the tenant a list of repairs which should have been carried out under the terms of the lease but which have not, in fact, been done. Instead of doing the repairs, the tenant may make a payment to the landlord.
– Where the landlord then disposes of the property or occupies it himself, the payment is likely to be treated as a capital receipt by way of compensation for failing to observe the terms of the lease as a result of which the property reverted to the landlord in a dilapidated condition. The sum paid to the landlord may then be chargeable, in his hands, to capital gains tax.
– Otherwise, the payment is likely to have the effect of filling a hole in the landlord’s profits (ie compensation for the lower rent the property can now command) and the payment should be treated as a receipt of the Schedule A business. Refer any cases to Business Profits Division 4 (Schedule A) where it appears that a material compensation receipt could be treated as income but resistance to this treatment is experienced.
Alternatively, the tenant may pay a sum towards the cost to the landlord of carrying out the repairs required. In that case, the landlord should only get a deduction for the net cost he bears, since ICTA88, S74(1)(d) allows no deduction beyond the sum actually expended. (Note that this is now the statutory authority for only allowing the landlord the net amount. ICTA88, s 31(5) applied to the old Schedule A, so it is now only applicable in CT cases.'

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By AnonymousUser
09th Oct 2006 10:26

Off hand ...
I'd have said it was property income (I'm trying to get out of the habit of saying the 'Sch' word but it's hard). I expect the tenant will be claiming as an expense, so I'd expect the receipt to tbe taxable as income on the other hand. I don't think the fact that the 'source' has ceased means that the amount is not taxable as income, as the post cessation receipts regime will apply to the rental business, but you should be able to deduct from the receipt the expenses incurred.

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