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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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.)
Phrasing
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. 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?
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.
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
Has the thought that this might be trading been considered.
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.
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
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.
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.
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.
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