Capital gains on buy to let

Capital gains on buy to let

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Hi

After a tenant trashed my client's property he decided to sell. 

In order to bring the property back to its original state numerous repairs were needed, can he offset these repairs against the capital gain or must this be offset against other rental income? 

The repairs were not improvements, but to reach full market potential the property could not be sold until the repairs had been met.

I would appreciate any advise on this. 

Many thanks

Replies (11)

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By User deleted
08th Jan 2016 11:51

Repair

I would say that a repair is a repair so that's the only route by which relief can be claimed.

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Replying to tom123:
paddle steamer
By DJKL
08th Jan 2016 12:07

I would agree

Phil Yaboots wrote:

I would say that a repair is a repair so that's the only route by which relief can be claimed.

I would agree.

Whilst not trashed, over the last 4-5 years we sold our flat portfolio as we exited the residential letting market, virtually all the flats were fully repainted before marketing for sale (Except those we sold to incumbent tenants).

The redecoration was merely putting the flats back into the condition they had been when we built them in the 1990s (Most had been redecorated a couple of times at least along the way) , it was certainly in our case clear cut as there had been 15-18 years of letting activity.

There might, I guess, be a little scope to consider capital treatment if the ownership and letting was a very short period, but only re those o/s repairs extant at point of purchase, not those arising from the trashing.

(Our most unique (inventive/creative) trashing some years ago was the tenants who appeared to have painted their buttocks and then pressed them against the walls of the flat. Another memorable flat was when the tenant kindly left us a tarantula (luckily in a glass box))

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Replying to Maddy Christopher:
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By Summer
09th Jan 2016 12:22

Thanks for that, love the last comment, really gave me a bit of a giggle

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By cfield
11th Jan 2016 10:34

Has letting business ended?

If your client has no other rental properties, the letting business will have ended the moment he decided not to re-let, so no expenses after that date would be allowable at all (unless they relate to the letting period itself). Certainly not after the flat's gone on the market.

If he is letting other properties, expenses continue to be allowable up to the date he sells the flat or changes its use (e.g.moves in himself).If so, this work counts as repairs and maintenance, as he is after all repairing the damage by the tenants, not improving it beyond the condition it was in when he bought it.

Thanks (1)
Replying to carnmores:
By cfield
11th Jan 2016 11:59

Post cessation expenses

cheekychappy wrote:

How sure are you Chris?

http://www.legislation.gov.uk/ukpga/2007/3/part/4/chapter/4

http://www.hmrc.gov.uk/manuals/pimmanual/pim2510.htm

I assume you mean section 125 re post-cessation expenses, but first it has to be a qualifying payment, which means it has to be wholly and exclusively for the letting business. Section 97 describes a qualifying payment mainly in terms of rectifying goods or services provided in the course of the trade. I think that means rectifying defects that were the fault of the supplier, not caused by the customer.

There is also of course the possibility of re-commencing the letting business, and HMRC do give you up to 3 years in PIM2510. However, that is only a rule of thumb and if the property was sold the owner would need to have kept the proceeds in a liquid form and not invested them in another business or as long-term savings.

Thanks for the query though. Always good to hear an opposing view as very often there are inconsistencies between the legislation and HMRC policy.

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Portia profile image
By Portia Nina Levin
11th Jan 2016 11:07

@ cheekychappy I am not sure what your point is. Cfield's comments most certainly reflect HMRC's view.

Post-cessation property relief does not extend to repair expenditure and relief for expenditure after cessation can only otherwise be set agains post-cessation receipts.

HMRC's views are not, in my view correct, but they are ultimately the views that one would have to argue with. I would seek relief against the rental income in these circumstances, but I do not want to restart that argument; others are free to represent their clients detrimentally if they wish.

Relief for the repair expenditure is not available for CGT purposes by reason of TCGA 1992, section 39(2).

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By pauljohnston
11th Jan 2016 12:09

How about

Once the letting has ceased (assume one property only) the property becomes an investment property.  I would ague therefore that the cost of making it ready for sale as itemised are an expense allowable for CGT purposes.

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Replying to DJKL:
Portia profile image
By Portia Nina Levin
11th Jan 2016 12:16

But Paul

pauljohnston wrote:

Once the letting has ceased (assume one property only) the property becomes an investment property.  I would ague therefore that the cost of making it ready for sale as itemised are an expense allowable for CGT purposes.

That still fails the test of TCGA 1992, section 39(2).

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Replying to DJKL:
By cfield
11th Jan 2016 12:25

Not a selling cost

pauljohnston wrote:

Once the letting has ceased (assume one property only) the property becomes an investment property.  I would ague therefore that the cost of making it ready for sale as itemised are an expense allowable for CGT purposes.

No, it has to be wholly and exclusively for the disposal, and incidental to it, such as legal fees. See TCGA92 s38 and CG15250. The list of prescribed expenses is exhaustive. Basically, they have to be professional fees or advertising.

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Portia profile image
By Portia Nina Levin
11th Jan 2016 13:20

@ Basil Go back and read section 39 again, and do it properly this time.

It is not saying what happens if, at all times, the asset has been used for the purposes of a trade.

It is saying if we deem the asset to have been, at all times, used for the purposes of the trade, would the expenditure be revenue expenditure of that trade. If it is then it is not allowable.

Section 39(2) applies to assets that have never been used for any business purpose, just as much as it does to those that have been used for such purposes for part of their period of ownership. It has the simple effect that any expenditure that is revenue in its nature is not deductible for CGT purposes under section 38(1)(b) or otherwise.

I have no idea what section 43 you are referring to, but if it TCGA 1992, section 43 then you are very misguided, because you have exactly the same asset throughout; it just happens to have been put to different uses.

I think "logic" compounded by complete rubbish is decidedly unhelpful to the OP.

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