Could somebody please tell me the correct indexation allowance treatment for enhancements to a rental property purchased 2004, improved-renovated over 3 years at a cost of about £13k per year and sold 2013.
Related resources
Replies (12)
Please login or register to join the discussion.
Various enhancements
But as there were various enhancements over a period of time and I am not sure if the client could tell me when one finished and another started, I was wondering whether there were guidelines that would simplify the calculation, for example allow it on a yearly basis.
If your client can't tell you ...
... then that is his problem. Does the company's fixed asset register not indicate when the expenditure was incurred? Does the company not have invoices or other paperwork to indicate when the expenditure was incurred? You say that you can't be certain if the company would know when one enhancement finished and another started - have you bothered to ask them?
You may decide to take a pragmatic view and, for example take the RPI at the midpoint of the period over which the expenditure was incurred. There might be some HMRC commentary on it but, frankly, I can't be bothered to look for it.
Out of interest
Does the legislation specify that the indexation calculation is to be based on RPI?
I'm just curious as RPI is no longer an official 'National Statistic' since the Office for National Statistics concluded that the underlying maths is flawed.
(If you want to know, the computations underlying RPI employ arithmetic means when - as any fule kno - geometric means are the way to go.)
The effect of the flaw is that RPI overstates the rate of inflation - which is great for the taxpayer who is indexing up his expenditures!
David
Plant register
The plant register for one property company has a column headed "RPI" (as well as all important date of cost incurred). One line = one date = one expenditure = one RPI. Then there's a column indexed costs being costs + RPI allowance (which works off a formula based on current RPI (current RPI being input in a column on first line of spreadsheet). It means at any given time I can be asked "if we sold property A for £ x how much would we pay tax on?" and provide a immediate response, even if, as in some cases, properties have multiple amounts of expenditure over many years.
In cases that I've dealt that were lacking a plant register in my preferred format (and no clue as to when costs incurred) it was necessary to review past annual accounts where additions will be shown and take a guess and use mid-point of the accounting period as the expenditure date unless there's alternative evidence to show a more accurate date and apply that date's RRPI factor to that particular lump of costs.
Indexation figures
Therese are published monthly by HMRC specifically for bodies liable to Corporation Tax, here's the current page:
https://www.gov.uk/government/publications/corporation-tax-on-chargeable...
@Portia
Thanks. It looks like it is hard wired into s54 TCG Act 1992. Don't tell Mr Osborne or he will change it to CPI.
David
@DMGbus
Thanks everyone for your comments, I had created a spreadsheet from the annual accounts so I knew what the yearly figures were it was just a case of what to do with them.
it could be worse
Just think yourself lucky, I have three pages of costs per month re a block of 27 flats we built as a one over 1995,1996 and 1997 which we are now selling flat by flat, 10 sold at different dates during 2014.
So when I get on to preparing the accounts for the company's year ending 31 December 2014 one of the joys is going to be calculating the indexation for each fractional cost to the appropriate sale date in 2014 in order to calculate the corporation tax liability for the year.
2015 will not be much better as we have already agreed sales of a further 7 flats.
However if the base month index figure is put alongside each fractional cost and the selling month figure is input via $a$1 mode, then once set up input the selling month index figure once and this should allow the sheet to recalculate instantly, then print one sheet for each month we make a flat sale computed for that month.
Having said that analysing the monthly costs we incurred during the build took over a day to prepare in the first place.