Capital Gains Tax on Residential Home

Capital Gains Tax on Residential Home

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 I have a client who has owned a residential home for twenty five years and he now wants to sell it. The facts are these:

1. He bought the house in 1990 and has never lived in it nor ever rented it out to anyone.It has been an unfurnished vacant possession all these years.

2. The house address was the address given in his tax returns as his home address for the last twenty five years although he actually lived with his parents.

3. He has been paying Council Tax on the property at a reduced rate due to the unfurnished vacant possession.

4. Over the years he has maintained the property and improved it by having the roof re-tiled, installing double glazing, new plumbing and electrical wiring etc.

He believes if he now sells that he will be liable for Capital Gains Tax on any profit he has made on the property due to him not physically occupying the house at any time during his ownership. I am unsure of how HMRC will deal with this. Is he liable for CGT and if so, can he increase his cost base by the £50k he has spent maintaining and improving the house over the years?

Replies (41)

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By cparker87
05th Aug 2015 14:23

Crikey

How many of us can afford to buy a house, not rent it and never live in it? I'm sure he can afford to pay his CGT bill =)

Regards the improvement costs yes, they will be deductible so long as they still exist at the point of sale.

Pretty unbelievable story! 

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Replying to CardiffAccountant:
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By [email protected]
06th Aug 2015 15:22

It is a pretty unbelievable story. My question has still not quite been answered: is he actually liable for CGT given that the house was nominally his main residence and it was never meant to be an investment property. It is just circumstance that he did not occupy the house. On what grounds would CGT be levied? Can you quote actual sections of the Tax Act please.

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Replying to CardiffAccountant:
By cfield
10th Aug 2015 13:55

Improvements? No way!

cparker87 wrote:

Regards the improvement costs yes, they will be deductible so long as they still exist at the point of sale.

In words you yourself used once, you must be "living in the land of the fairies" if you think these are improvement costs.

Any proper accountant knows that double glazing is treated as maintenance now, not improvement. You can't have it both ways and treat it as capital just because you never claimed it against rent. New plumbing and re-wiring is also maintenance, unless substantially expanded to cover extensions, etc. The clue is in the word "re" which means to do something again. Re-tiling the roof is also maintenance as there must have been tiles there before.

Someone mentioned that painting and decorating can be an improvement cost. Normally that is not the case. The only reason it was allowed in the Day/Dalgetty case referenced above is because the house was sold just 2 months later at a 30% profit and clearly the decorating must have increased its market value, given that they bought it in a dilapidated state. Also, it was held that the taxpayers never actually lived in the house and had no intention of making it their permanent residence, so the decorating was obviously done for no other reason than to increase its market value.

That would not apply in the OP's case as the house was owned for 20 years, and after that length of time, no part of the gain can be attributed to decorating with any degree of confidence. We are not told when the decorating was done, but even if it was just before sale, it is unlikely to make any difference unless it was in a pretty poor state when it was bought, in which case it would probably have fallen down by now. Certainly required more than decorating anyway.

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Replying to the_fishmonger:
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By cparker87
11th Aug 2015 12:53

Sorry I'm not proper

cfield wrote:

cparker87 wrote:

Regards the improvement costs yes, they will be deductible so long as they still exist at the point of sale.

In words you yourself used once, you must be "living in the land of the fairies" if you think these are improvement costs.

Any proper accountant knows that double glazing is treated as maintenance now, not improvement. 

I don't recall the quote. Double glazing would not always be treated as a repair if for example it was incurred before the property subsequently being let ("initial repairs - SP D24). Whether the client's intention would form part of HMRC's opinion as to whether they would allow that I do not know. 

I also concur with Justin's thoughts on the existence of double glazing increasing the price as it currently stands (but we could say the same about it still having a roof). 

CG14311 appears to express an acceptability for "dilapidations" and in their example the expenditure is incurred 9 years before the sale of the asset. The rewiring is rejected however under s39(2). What those dilapidations are I do not know. What are your thoughts on that cfield? 

This has turned into quite an interesting thread in any case. I'll watch eagerly to wait for Steve's thoughts on thehaggis' opinion on s39(2). 

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By JCresswellTax
05th Aug 2015 14:26

Be careful

Improvements are allowable against CGT bill, maintenance costs are not.

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By Justin Bryant
05th Aug 2015 14:55

A closer look
The case in the link below shows that you will get decorating etc. (i.e. revenue type) costs allowed under s38(1)(b) TCGA 1992 if you sell as an investment in due course, as long as such expenditure enhances the property (which it usually will).

http://www.bailii.org/uk/cases/UKFTT/TC/2015/TC04343.html

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By Manchester_man
05th Aug 2015 18:49

Is he called Graham by any chance ?

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By stratty
06th Aug 2015 15:27

Residence

I would have thought the client needs to live in the property for it to be his residence.

https://www.gov.uk/government/publications/private-residence-relief-hs28...

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By Steve Kesby
06th Aug 2015 15:29

You have stated in your OP...

... that his main residence, as a matter of fact, was his parents house. You do not need to own a property for it to be your main residence.

You appear to be assuming that only or main residence relief under TCGA 1992, s 222 will apply. On the facts given it will not, and it will, in consequence, be liable to CGT, like any other chargeable asset. Nobody will be able to point you to legislation that does not say otherwise.

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Stepurhan
By stepurhan
06th Aug 2015 15:39

Statute

Relevant statute here.

In the absence of a specific definition, words are taken to have their general English meaning in statute. The statute refers to the relief applying to the taxpayer's residence. (1a). Residence is defined as "the place in which one lives". This property has never been the place in which he lived, hence cannot qualify for relief.

I'm intrigued as to what you mean by this though.

<a href="mailto:[email protected]">[email protected]</a> wrote:
It is just circumstance that he did not occupy the house.

It is just fact that he did not occupy the house. What do you mean by it being just circumstance? What prevented him ever occupying it?

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By Paul D Utherone
06th Aug 2015 16:50

All of the above

and also bear in mind that HMRC clearly do check things like Council Tax records and the fact that a property has been registered as unfurnished vacant possession has come up in PPR cases at Tribunal in recent years.

As posted, and as Steve has set out, the property does not qualify for exemption under TCGA s222.

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By User deleted
06th Aug 2015 17:09

.

This is a bit off on a tangent (I'm good at that)

 

If, for arguments sake, the individuals father was physically incapacitated and the individual was living with his parents in order to care for him (say his mother was not strong enough to move him).

And the sole reason for him not occupying the property was that of the need to care for a member of his family. Would there be any discretion in the view of HMRC or the Courts?

- I'm inclined to say no, however I do not know.

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By Justin Bryant
06th Aug 2015 17:44

No

The relief you might be thinking of worked the other way round. See:

http://www.hmrc.gov.uk/manuals/cgmanual/CG65550.htm
If he is married there is a way to wash out this gain however.

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By geoffwolf
10th Aug 2015 11:55

voting register

Wnere is he registered to vote from? If at the parent's address he cannot claim ppr relief

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Replying to mr. mischief:
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By cparker87
10th Aug 2015 12:28

Seems pretty draconian

geoffwolf wrote:

Wnere is he registered to vote from? If at the parent's address he cannot claim ppr relief

 

Whilst I agree it is indicative, it is surely not fatal? What if the chap was not registered to vote at all.

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Replying to mr. mischief:
By Paul D Utherone
10th Aug 2015 12:49

As he's had it registered as vacant for council tax

geoffwolf wrote:

Wnere is he registered to vote from? If at the parent's address he cannot claim ppr relief

not likely to be the house he's now selling.

There doesn't seem to be much complexity as posted in the OP.

Bought a house 25 years agonever lived in itregistered the property as unfurnished vacant possession for council tax

The only thing he has going for him is that it's his registered address for tax returns, but that really is not sufficient to make it eligible for PPR, and I would suggest that you could not be happy either to agree to submit a return that claimed PPR, or allow HMRC to amend a return that showed the disposal with no relief to give the relief because they thought it was due based solely on where he was registered with them.

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By Phi
10th Aug 2015 12:13

If he never lived there, no CGT relief

H didn't live there so it cannot have ever been his main residence so no PPR. No PPR means no lettings relief, but as he never let it out, that's irrelevant anyway.

He will be liable on the gain. He could consider transferring into joint names with his wife or civil partner.

He could also consider passing part of the property to other family members using a trust to help reduce the gains, but unless you are expert in this type of planning, I suggest you get him to take advise from someone who is expert in this.

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By flurrymc
10th Aug 2015 12:16

another possibility

It is possible that what we have here is a very slow builder, who bought a house in order to develop it and sell it at a profit.  

It was in a bit of a state when he bought it and he only had a few hours each weekend when he could work on it.  He is a loner and has no friends, so he worked strictly on his own, or he is a bit of a lad and goes out with his friends Friday and Saturday nights, so they could only work late in the afternoon and even then caused almost as much damage as repairs when they got round to doing anything.

In which case it would not be liable to CGT, but to IT.

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Replying to Red Leader:
Stepurhan
By stepurhan
10th Aug 2015 12:38

Other liability

flurrymc wrote:
In which case it would not be liable to CGT, but to IT.
Also he would be liable to fairly hefty penalties for failing to submit self-employed VAT returns for this development business.

This is a very dangerous road to travel down regardless. The whole thing sounds like a made-up story simply to reduce the tax bill (with good reason, since it is), and I would expect HMRC to challenge it as such. Nothing in the OP indicates this was his intention all along. Indeed, if he bought it intending to use it as his own residence, I doubt it was in a bit of a state in the first place. The OP also states that he has "had things done", implying he did little if any work himself. HMRC would tear this little tale apart, and the client would not thank you for the stress and possible additional penalties (for deliberate falsification to reduce a tax bill) resulting.

Working for clients sometimes means giving them the bad news that nothing (legally) can be done. Encouraging them to make stuff up is not acting in their best interests.

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Replying to Justin Bryant:
By flurrymc
10th Aug 2015 13:33

Not a road I was suggesting

stepurhan wrote:

This is a very dangerous road to travel down regardless. The whole thing sounds like a made-up story simply to reduce the tax bill (with good reason, since it is), and I would expect HMRC to challenge it as such.

 

My story was not by way of a suggestion, but more of a warning!  The income tax and national insurance on a trading activity would be more than the CGT liability.

The problem I have with the OP's story is that i find it difficult to conceive of someone owning a property for 25 years and not exploiting it in any way, either by occupation or rental, unless it was for some reason unexploitable.  I think that the OP will need a better story than that the client did nothing with the property.

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Replying to Rammstein1:
Stepurhan
By stepurhan
10th Aug 2015 14:32

More implausible?

flurrymc wrote:
My story was not by way of a suggestion, but more of a warning! 
Unfortunately it reads like a suggestion, hence my response.
Quote:
The income tax and national insurance on a trading activity would be more than the CGT liability.
Not necessarily. There is a lot more scope for deductions from holding the property for a trading activity than for capital gains. The regular maintenance over the years for example. I'm not saying you are wrong but (were trading an option) then I'd want to run the figures to see which was better.

Quote:
The problem I have with the OP's story is that i find it difficult to conceive of someone owning a property for 25 years and not exploiting it in any way, either by occupation or rental, unless it was for some reason unexploitable.  I think that the OP will need a better story than that the client did nothing with the property.
I also find it difficult to conceive. However, I don't find the "extremely slow developer" story any more plausible, and I can't see HMRC putting it forward as an alternative. Given the lack of PPR relief resulting in the gain being taxed in full, accepting that is the easy option for HMRC and the one I would expect them to take. The number of vacant properties around the country is proof that property owners do not always exploit their assets properly.
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By pjhorn
10th Aug 2015 12:30

Technical notes
From CCHNeed for occupation

Having identified the length of the period during which the property in question has been owned by the taxpayer, it is necessary to then determine the time he has occupied that property as his only or main residence. In general terms such occupation will be necessary to secure the exemption, mere ownership is insufficient.

The situation becomes more complex where:

(1)the taxpayer is absent from the property for whatever reason; here certain periods of absence are ignored, for example living in job-related accommodation and temporary absences...........

 

From HMRC Manuals 

HMRC CG65003

 

ESC D49 sets out three circumstances in which you should allow relief for a period between the acquisition of land, including land on which a dwelling house stands, and the beginning of residence in a dwelling house on that site. Those circumstances are,

•where the delay in taking up residence is because a dwelling house is being built on that land,

•where the delay in taking up residence is because of the continuing occupation of the previous residence while arrangements are made to sell it,

•where the delay in taking up residence is because alterations or redecorations are being carried out.

The concession allows relief for a period up to 12 months, although where there are good reasons for the period exceeding 12 months which were outside the individual's control the period may be extended up to 2 years. The extended period which can qualify for relief in these circumstances is explained at CG65009. The effect of these provisions is explained at CG65013.

 

[CG65046]  Private residence relief: periods of absence: conditions

TCGA92/S223 (7) defines a period of absence as a period during which the individual has no other residence eligible for relief, for the meaning of this phrase see CG65047

There are two further conditions both of which must be fulfilled before a period of absence, defined at CG65030, can qualify for relief by virtue of TCGA92/S223 (3). These are set out at TCGA92/S223 (3A) & (3B).

Condition A

Before the period of absence there must be a time during which the dwelling house was the individual's only or main residence.

Condition B

5.After the period of absence there must be a time during which the dwelling house is the individual's only or main residence (if within S223 (3) (a), (b), (c) or (d)), or

6.The individual was prevented from returning to the dwelling house as a consequence of the individual's employment requiring them to reside elsewhere or as a condition reasonably imposed to secure the effective performance of the employee (if within S223 (3) (b), (c) or(d)), or

7.The individual lived with a spouse or civil partner to whom (b) above applied (if within S223 (3) (b), (c) or (d)).

Condition A and Condition B(a) require that both before and after the period of absence there must be a time during which the dwelling house is the individual's only or main residence. For an explanation of this condition see CG65050.

 

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By janefg
10th Aug 2015 12:50

PPR
Had he formally designated the house with HMRC as his PPR?

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Replying to Justin Bryant:
By Paul D Utherone
10th Aug 2015 13:21

Makes no odds

janefg wrote:
Had he formally designated the house with HMRC as his PPR?
if he never lived there
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By Paul D Utherone
10th Aug 2015 13:42

Not sure that any of this is an issue with the client

in the OP it says the client "...believes if he now sells that he will be liable for Capital Gains Tax on any profit he has made on the property due to him not physically occupying the house at any time during his ownership. " And the answer to that is, he is correct.

There's no relief obviously available, as the property was never occupied, and it seems highly unlikely that 'trading' will be an issue on a property owned for 25 years.

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By davehome
10th Aug 2015 14:23

Some CGT relief

Should be available if he was to live there for a time (as long as possible) before he sold it. At least 18 months' would apply for PPR.

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By Justin Bryant
10th Aug 2015 17:17

cfield

I am not sure you are right. Where in the link below or the Day/Dalgety case does it say that double glazing cannot be a s38 capital expense (we all know it is normally a revenue expense for lettings, but that does not exclude it from being a s38 capital expense e.g. where there are no lettings)? You must be wrong here, as painting & decorating was considered  a s38 capital expense in that Day/Dalgety case (and that is no more allowable in principle under s38 than double glazing).

http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

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Replying to Matrix:
By cfield
10th Aug 2015 18:37

Double glazing

Justin Bryant wrote:

Where in the link below or the Day/Dalgety case does it say that double glazing cannot be a s38 capital expense.

http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

Double glazing wasn't an issue in Day/Dalgety so obviously wasn't addressed. If it had been, it may well have qualified as an improvement cost for the same reason as the painting and decorating did, but you have to remember this case was somewhat unusual in that a) the owners never lived there (or at least the Tribunal didn't believe they had) and b) they made a 30% profit in just 2 months, and it was considered highly probable that the painting/decorating contributed significantly to that sudden increase in value.

The OP's case is different in that the house has stood empty for 25 years, so there is no obvious link between the remedial work and the increase in its value over that huge length of time.

The point I was trying to make is that you can't just claim double glazing as a capital cost because you never claimed it as repairs and maintenance. It has to stand on its own 2 feet as a capital cost (e.g. be incurred wholly and exclusively for the purpose of increasing its value), and in most cases that would be very difficult to prove, because the longer the asset is held between incurring the expenditure and disposal, the more likely it was for other reasons, at least in the case of "minor" works like double glazing.

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By Steve Kesby
10th Aug 2015 18:05

Section 38 expenses

Do not need to be capital in nature. They simply need to:

be incurred wholly and exclusively for the purpose of enhancing the value of the asset (over what it was before the expenditure was incurred), andbe reflected in the state of the asset at the time of disposal.

Repair expenditure before sale will enhance the value of a sale. Or looked at properly, disrepair will reduce the value of the property.

There is a course then an elimination of any expenditure that has been given relief against income tax, under s. 39, which gives further credence to the permissibility of expenditure of a revenue nature under s. 38.

That being said, I think that Chris Field's concerns over some of the expenditure may be valid. If it was carried out years ago it is less likely to still be reflected in the state of the asset at disposal. I would be more inclined to disagree on the doubly glazing expenditure though. I don't see anything wrong with Chris Parker's comment though, give its caveat.

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By thehaggis
10th Aug 2015 20:36

Revenue expenses

Does s39(2) not prevent any expenses that could be a revenue expense from being allowed under s38?

 

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By Justin Bryant
11th Aug 2015 12:20

I don't think so

If s39(2) TCGA 1992 said "working capital", rather than/in addition to "fixed capital", then I think it would be disallowed. Also, HMRC would have pleaded that in the above case if that were a problem. Also, how on earth can double glazing, that usually has a long guarantee (e.g. 30 years) and lasts for years, not enhance the value of a property (assuming it replaces single glazing)?

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By Ruddles
11th Aug 2015 13:00

I don't understand, Justin

Surely a house or other property would be treated as a fixed asset, and therefore any revenue  expenditure would be disallowed? HMRC's view, for what it is worth, corresponds with that of Haggis. (Capital Gains Manual 14306). There is also a link to a helpful case there, which appears to confirm that there is no requirement for the expense to have been deducted, only that it would have been deductible.

(As someone who tends to ask more questions than they answer on this site, I'll happily be proved wrong.)

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By Steve Kesby
11th Aug 2015 13:23

S. 39(2)

I do agree that s. 39(2) has the effect that CG14306 and thehaggis says that it does. I confess to only having read s. 39(1)! Accordingly, the painting expenditure in the Day case should probably have been disallowed.

Tribunal decisions are only ever as good as the arguments offered by the respective sides, and I think that HMRC missed a trick by not arguing under s. 39. I can't see that it was mentioned or even considered, when it clearly should have been. HMRC are unlikely to take the point to the UTT on that alone though.

I agree with points made by other respondents that double glazing should probably be allowed. A Law Shipping based argument might get some of the other expenditure allowed, and might have been successful with Miss S's rewiring in CG14311. However, I am not now anywhere near as bullish as Basil.

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By cfield
11th Aug 2015 16:02

s39(2) meaning of "trade" and s39(1) "insufficiency of income"

Section 39(2) refers specifically to a "trade" and, as we know, property letting is not regarded as a trade for Entrepreneurs Relief (or Business Property Relief either, but that's an IHT issue).

I don't see how it can be a trade for one purpose under Capital Gains Tax and not for another. It is not even regarded as a trade for income tax purposes, otherwise Class 4 NI would apply.

Assuming it is not a trade, then we only need to consider s39(1). It seems to me that the key words here are "insufficiency of income". If there is no letting business at all (as is allegedly the case here) then can insufficiency mean no income whatsoever, or does there have to be at least some income in order for it to be insufficient?

In the absence of a clear distinction, we have to go by the normal usage of the word. You don't normally say something is insufficient if it doesn't exist at all. You only use it when what was offered/done was not good enough to achieve its intended purpose. Surely then, s39(1) would only bite if there had been a letting business at the time or it could not have been claimed as pre-letting expenditure later.

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By Steve Kesby
11th Aug 2015 16:19

@ Chris (Field)

You need to read s. 39(2) again. It imposes a hypothetical based test.

It says that if the asset(s) were [to be treated] as (a) fixed asset(s) of a trade, and the expenditure would be deductible from the profits of that [deemed] trade, then the expenditure cannot be deducted under s. 38.

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By Justin Bryant
11th Aug 2015 16:57

That's slightly odd

As, in a hypothetical situation, much depends on accounting treatment (Odean cinema case etc.) and if you prepare accounts showing the expense as an addition to fixed assets then that may help on the s39(2) point (although accounting treatment is not determinative here, it is persuasive). Perhaps that's what happened in the above case. 

It is perhaps notable that the case below that HMRC cite in their Manuals concerned items that would not normally be able to be capitalised in the accounts.

Emmerson v Computer Time International Ltd (in liquidation) 50TC628

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By Steve Kesby
11th Aug 2015 17:08

@ Justin

I'd agree with your observations on accounting treatment, but the accounting treatment under GAAP is now more consistent with the entirety concept favoured by HMRC.

Computer Time International is not wholly dissimilar to Raha.

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By Justin Bryant
11th Aug 2015 18:30

Yes

In practice, I would tell such a client to produce accounts showing the expenditure capitalised (to the extent that is permissible under GAAP) and then you at least have a filing position re s39(2).

Above all, if the expenditure is on a dilapidated building then it should be capital per the following extract from the link below:

"Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure."

http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

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Replying to Paul Crowley:
By Ruddles
11th Aug 2015 20:42

Badges of Trade

fawltybasil2575 wrote:

The fact that the disposal will be 25 or so years, rather than the more normal [say] 1/2 years, is not relevant.

 

I don't think it is correct to dismiss the timescale so readily:

"The interval of time between purchase and sale may be important. A person who buys an asset and holds it for many years before disposing of it may be in a stronger position to argue that this is the realisation of an investment."

Not conclusive in isolation, but certainly a factor to consider, is it not?

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By cparker87
11th Aug 2015 23:32

simpler?

Basil, 

Would it not be simpler to simply recommend that the owner lets the property for a short period now before sale to provide a little more credence to the pre-trading expenses? I accept your points but a fight over a 25 year period sounds like it may be rather protracted.

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By [email protected]
12th Aug 2015 14:54

I have been reading all of your responses and have enjoyed how the thread has developed. To give further information on the client : he purchased the house for £68k in 1990 with a mortgage. He has been paying the mortgage ever since and has recently paid it completely so there is now no charge on the property. The 'circumstance' in question is just that he has always been a highly-paid salaried individual and the payment of the mortgage was an incidental outgoing.
The property came in to disrepair and two years ago the client decided to bring it up to a sellable condition. He reckons he would get £200k for the property after having spent the best part of £50k on repairs and improvements.

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