base cost for capital gains tax

base cost for capital gains tax

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Hi,

Client purchased freehold of a property in 1987 and redeveloped it into flats ie ground floor and first floor and granted ninety nine year leases on them to Mr H  in 1988. Mr H lives in the ground floor flat and in 2012/13 paid client 13k for the freehold.How would I calculate clients base cost of the freehold for capital gains tax purposes? Any help greatly appreciated.

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By Paul Soper
16th Jan 2014 18:43

A/A+B?

Your client has an original cost under s37 TCGA which will depend on what happened in 1988 when the original leases were granted.  If the redevelopment was treated as a trading transaction with a trading disposal at the time your client would, I assume have appropriated the value of the reversion (the freehold subject to the 99 year lease) as an investment asset at the time, with the majority of the acquisition and enhancement/improvement costs offset against the trading profit arising.

If the 1988 disposal was subject to CGT then the total of the acquisition and enhancement costs should have been apportioned between the disposal and the reversion using the formula A/A+B where A is the value of the part disposed of (assuming an arms length transaction the disposal proceeds) and B is the value of the reversion at that time.

In all probability there will not be an enormous difference between the two figures, but as the second involves apportionment it will be a different figure.  Of course it is probable that no-one has retained the records going back that far so you would to estimate the reversion figure and use CG34 to initiate a process of valuation with HMRC when you might discover that the valuation office do have the records you need even if the client, you, the previous accountant if there is one and HMRC have all disposed of the records long ago.

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