Capital Gains on Residential Property

Capital Gains on Residential Property

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Hi Everyone,

I am embarassed to ask the following question as usually they are very straightforward and I have got my self in a bit of a pickle so i wanted to run it past you to ensure i am on the same page as you tax specialists.

My client has disposed off a property during the year which is liable to capital gains tax and I wanted to clarify the treatment of some of the items to ensure it is consistent with HMRC views.

Property was bought cash and they took out a bridging loan (secured against the property) in order to finance the cost of the improvement works – I have said to the client this is tax deductible and can be included in CGT calculation.

They also occurred utility bills and building insurance whilst these improvements were being done – I imagine they can form this as part of the CGT calculation (as this didn't rent the property out).

My client also has another property where they did renovations with a view of selling the property by they were unable to do so during the year so instead are letting this out. Am I right to think they cannot offset these capital expenses against the property which was sold and instead will have to form this as part of the calculation whey they eventually sell the property?

Last question, is there anyway they can defer paying this capital gain by using reliefs?

I will be really grateful if I can have another pair of eyes confirming the above before I do the final submission.

John

Replies (24)

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By User deleted
27th Jan 2015 12:11

Hmmm

Bridging loan deductible? No

Cost of improvement works? Possibly, provided the expenditure is still reflected in the property when sold.

Insurance and utility bills? No

Renovations on second property - allowable only against that property, nothing to do with the property being sold.

Reliefs? None that spring to mind, except - did client receive full consideration on sale or is any of it deferred? (I suppose there is also a possibility of rollover relief, but this would depend on what the property had been used for, and intention re use of the proceeds.)

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Replying to Tax Dragon:
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By John1965
27th Jan 2015 12:29

Thank You - still a few question

BKD

Thanks a lot for your thoughts, however, not clear on the following:

Bridge-loan, why will the interest not be deductible on that? Given the loan and interest paid was in part to finance the repairs, surely the interest paid will be deductible?

Ongoing running costs e.g. insurance and utility bills? why are these not deductible as they were ongoing running costs while the repairs were taking place. Is there anyway they can claim this? Instead can they claim under "rental property" so show a loss while this was being done?

They received the full funds as propery was paid in cash and it was residential property. They only have rental property (residential) and as far as i'm aware the proceeds have not been invested in another property. So i gather nothing can be done to defer this gain?

 

 

 

 

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Replying to Elgin:
Stepurhan
By stepurhan
27th Jan 2015 12:33

Phrasing

John1965 wrote:
Bridge-loan, why will the interest not be deductible on that? Given the loan and interest paid was in part to finance the repairs, surely the interest paid will be deductible?
Your OP made it sound like you'd told client that the loan was deductible. The loan itself is, of course, not a deductible expense.
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By User deleted
27th Jan 2015 13:07

A few answers, then

In addition to Stepurhan's response above.

The interest will not be deductible in computing the gain. It may have been allowable as a revenue expense.

Ditto the utility bills and insurance costs (though probably treated as pre-trading costs and set against income in the first period of rental).

Are you still in time to amend the relevant return(s)/consider an overpayment relief claim?

No deferral.

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Replying to Matrix:
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By John1965
27th Jan 2015 13:19

Thanks Stephen and BKD

Thanks guys for shedding colour on this.

Just to recap

I cannot claim the interest paid on the loan (treat this as a finance cost), eventhough the loan was raised to fund the improvement as a collateral against the gain? Apologies for the confusion if it sounded like i mentioned the actual loan was deductible.

Utility bill/insurance cost are non deductible as well (as part of the capital gain calculation), Can these be included anywhere in the calculation to claim the relief? The property was at no stage in a position for rental so i can't claim this as a relief under property income.

I am in a position to guide the client and submit an amended return as he came to me for a second opinion on the return he had submitted.

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Replying to Matrix:
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By John1965
27th Jan 2015 14:39

Thank You

thanks a lot - missed a massive point here!

 

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By User deleted
27th Jan 2015 13:25

OK, here's another question for you

What makes you think that the gain is liable to CGT?

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Replying to frankfx:
Portia profile image
By Portia Nina Levin
26th Apr 2015 10:30

(No subject)

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Replying to gillybean04:
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By John1965
27th Jan 2015 13:37

@ Portia - thank you, not for a minute did i doubt it may not be liable to CGT.

Hoping you can shed your widesom on

borrowing of a loan (secured against the property) to fund the renovation - can this not be treated as a finance cost and be deductible for CGT?

Probably unfair if the client can't deduct this interest cost given he cannot get relief elsewhere as the property was not rented during the time of renovations. Yet again it is tax and anything is possible!

 

 

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Portia profile image
By Portia Nina Levin
26th Apr 2015 10:29

(No subject)

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By Paul D Utherone
27th Jan 2015 13:53

How long did he own the property

What was his intention at the outset for the property, and as BKD says; what makes you think the gain is liable to CGT?

I suspect you may be missing a large serving of sarcasm in Portia's replies

 

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Replying to lionofludesch:
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By John1965
27th Jan 2015 13:56

Owned the property for 2 years

the intentions of the property was always to buy, renovate and sell - it's quite clear to me this falls under the realms of CGT.

Totally missed her sarcasm given i am new to this forum. Will try remembering that going forward :-)

Any final thoughts on the treatment of Loan raised to fund the renovation?

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Replying to atleastisoundknowledgable...:
paddle steamer
By DJKL
27th Jan 2015 14:11

Has the thought that this might be trading been considered.

John1965 wrote:

the intentions of the property was always to buy, renovate and sell - it's quite clear to me this falls under the realms of CGT.

Totally missed her sarcasm given i am new to this forum. Will try remembering that going forward :-)

Any final thoughts on the treatment of Loan raised to fund the renovation?

Whilst you are more in possession of the facts than we are, given your above statement might your client not have been trading?

Have you considered this?

I strongly suspect that is what some of the earlier posts are inferring.

 

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Replying to lionofludesch:
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By John1965
27th Jan 2015 14:20

Something i did not even consider

No wonder i missed the sarcasm, i did not even consider this being viewed as trade activity instead of CGT. Something i really need to query the client on.

 

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Portia profile image
By Portia Nina Levin
26th Apr 2015 10:31

(No subject)

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By User deleted
27th Jan 2015 14:18

That is exactly what I was inferring

(and pointed out by PM)

 

the intentions of the property was always to buy, renovate and sell - it's quite clear to me this falls under the realms of CGT

You really do need to re-consider the second part of that statement

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Portia profile image
By Portia Nina Levin
26th Apr 2015 10:31

(No subject)

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Replying to pauljohnston:
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By John1965
27th Jan 2015 14:35

Portia,

The property was brought in cash  - they decided to take a loan out to make capital improvements to this property. Surely, in the event of HMRC querying this transaction he will argue he brought the property for investment purposes with a view of renting it and then decided to sell it. probably has a weak case looking at the facts it was purchased  23/06/12 and sold 05/07/13 (which will indicate otherwise).

Given he has a portfolio of other properties which are on rental (i believe this is the only transaction whereby he has done this), could HMRC take a more

sympathetic view on this?

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By User deleted
27th Jan 2015 14:56

Facts, facts, facts

The treatment should depend on the facts - which in arguments about trade v investment may not always be clearly defined.

The fact that the client already has a portfolio of existing rental properties may strengthen his argument that this was an abortive investment acquisition. But I'd be interested in supporting that argument only if I were comfortable that there was any truth in it. Your call.

But to reiterate for the final time - should you go down the CGT route, you cannot claim a deduction for the interest (or any other revenue costs) when computing the gain.

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Replying to accountantccole:
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By alpha2014
27th Jan 2015 15:41

Thank you everyone
All - thanks a lot for your time to contributing to this thread. I am glad I asked the question as I crucially missed out trading aspect.

Ultimately I will leave the choice to client which route he decides to go. To give you some background it was more or a clarification for him revenue vs capital treatment but fundementally there was a bigger issue which I have informed him on. As he has already submitted his return the choice is his.

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By User deleted
27th Jan 2015 15:43

Multiple user accounts?

Tut tut

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Replying to David Heaton:
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By John1965
27th Jan 2015 16:00

Of course I will advise him it's most likely to fall under a trade, if he decides to persist and show as CGT then he will have to make the adjustments given he has deducted for interest and utility bills

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By duncanedwards
27th Jan 2015 18:17

If you were told that "the intentions of the property was always to buy, renovate and sell" then if your client "decides to persist and show as CGT", I think that puts you in a very difficult position with regards to your professional and legal responsibilities.

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By Amit Roy
03rd Apr 2016 18:25

Interest Costs are allowable deductions

Usual answer is no.

 

But If the client did these works under a company - Interest Costs are allowable deductions.

 

HMRC Guidance

http://www.hmrc.gov.uk/manuals/cgmanual/cg15284.htm

 

Primary Legislation

http://www.legislation.gov.uk/ukpga/1992/12/section/40/enacted

 

 

 

 

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