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Abortive selling costs and Capital Gains Tax

Taxpayer has sold the asset on which he incurred abortive costs. Capital & allowable?

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Taxpayer has held a plot of land for some years. A few years ago, he placed it on sale and had a prospective buyer. He incurred some costs preparatory to the proposed sale but the buyer could not complete. Can he now add these costs to the asset for the purposes of calculating the CGT on the sale that went through in 2019-2020?

This is from CTM08260 - Company Taxation Manual 

Expenditure connected with the disposal of an investment

Similar considerations apply where it is a disposal rather than an acquisition that is being considered. Once it has been decided to dispose of an investment in some way, any costs incurred after that point will be costs of the disposal and therefore capital. We would generally consider the decision to dispose of an asset to be the point at which a decision was taken to market it.

This is obviously a Company Tax Manual. What would the position be for CGT?

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By Accountant A
15th Jun 2020 18:18

'ph'ple?

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By Wanderer
10th Jun 2020 12:15

Has been discussed on here before. Abortive sale costs generally not deductible.
Google site:accountingweb.co.uk capital gains tax abortive sale costs
e.g.
https://www.accountingweb.co.uk/any-answers/abortive-legal-fees-deductib...

https://www.rossmartin.co.uk/private-client-a-estate-planning/capital-ga...
"Fees for the cost of abortive purchases are not allowable for CGT, nor are mortgage arrangement or financing fees."

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Hallerud at Easter
By DJKL
10th Jun 2020 12:18

I had one of these a couple of years ago, we put some property up for sale (complicated as involved sale of land with a tricky title plus another asset and each part was owned by a different company we controlled) The deal progressed along, last gasp deal did not consummate, we then paid out a fair bit in legal fees.

Roll on 18 months and a different buyer but roughly the same deal. I had a chat with our solicitors and got them to give a split re their first fee as to what of the work they did earlier was still of use re the later sale and what was abortive and not relevant (I did also receive a lower fee second time around which made sense).

Having got their apportionment for the first fee I then claimed the carry over work against the later sale plus the legal fee charged for the later sale. (Luckily only had one agent fee as they charge us on basis of deal getting over the line, so no first deal no fee)

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By Montrose
10th Jun 2020 15:03

I agree with A.
Costs such as costs preparing paperwork which will be used when the land is sold [survey costs, plan preparation, title clarification ,contamination reports etc.] might be deductible on the basis that they were necessarily incurred to enable the land to be sold.
Legal or agent's fees on negotiating the aborted sale would not be deductible

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By whitevanman
10th Jun 2020 15:11

This raises a few interesting points.
Everyone "knows" (or so it seems) that the costs of an abortive sale are not allowable. But why?
Whilst it is obvious that you shouldn't get a loss for abortive acquisitions (where no asset is acquired), is that necessarily the case for a disposal?
I am not aware that it has ever been litigated.
What s38 refers to are the costs of making "the disposal" and in that regard the emphasis that is placed on "the" is relevant.
If you take it as referring only to the specific transaction that results in sale, earlier costs would not be allowed. That would apply to the scenario mentioned by DJKL (unless the costs enhance the value of the asset and can be claimed as such).
If you interpret it as being simply a reference to the eventual disposal, why would that preclude abortive costs?
It is not unusual to have an abortive sale on which (say, legal) costs are incurred. If a new buyer comes along and sale is duly completed, why are the earlier costs not allowable? They are legal fees (so within the categories in s38) and were incurred W&E for the disposal of the asset. The fact that the specific transaction fell through would not seem to be relevant.
It would, perhaps, be different if an asset was withdrawn from sale after an abortive transaction and then re-advertised and sold some time later.
I would like to hear HMRC's take on this. I don't think it is actually covered in their guidance. Worth a punt in my view.

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Replying to whitevanman:
Psycho
By Wilson Philips
10th Jun 2020 15:34

I think you are making the error of ignoring the importance of "the".

I incur survey fees in relation to a proposed sale. The sale falls through.

3 years later I put the property back on the market, incurring fresh survey fees, and the sale completes.

I don't think that I would be wasting my time or my client's money in trying to convince a Tribunal that the earlier survey fees were an incidental cost of the actual disposal.

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Replying to Wilson Philips:
Hallerud at Easter
By DJKL
10th Jun 2020 15:56

I am selling the solum (bit under the water) of part of a river that was previously tidal but by Act of Parliament is no longer (Title of river beds in Scotland generally running with Riparian owners of the banks, but not so with tidal which were originally Crown property)

My solicitors do a lot of work on ensuring they have a good title pack to furnish to the buyer's solicitor, this they do but the deal fails, buyer departs.

18 months later new buyer on scene, we use same solicitors to deal with conveyance, luckily individual solicitors have not moved firm in interval so have all earlier work /paperwork to hand (This is a first registration transaction, no Land Cert) and use that earlier work to assist them with this later sale.

I accept some costs of first transaction are dead, a PEC paid for (property enquiry certificate) is stale, a new one now needed, but the title research, style of offer being used are the same (because these days we tend to have offers to sell not offers to purchase) . Given we are also selling in conjunction a non land asset, and the two deals must fit side by side (both complete not one complete, they must be conditional on one another) then further drafting done on abortive sale is still relevant.

I believe if the actual circumstances and facts are followed these earlier costs are allowable, they have been eventually used to make the second disposal, but I do appreciate this will not always be the case, each case will be different.

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Replying to DJKL:
Psycho
By Wilson Philips
10th Jun 2020 16:13

I don't have a problem with arguing that costs that can be shown to have a direct link with the actual sale should be allowed. In the example that I referred to, if the purchaser were happy to rely on the valuation carried out earlier I would be claiming a deduction. The obvious distinction being that if a second valuation is carried out to support the actual sale, it is difficult to see a successful argument that the first must also be an incidental cost of that actual sale.

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Replying to Wilson Philips:
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By whitevanman
10th Jun 2020 16:47

I don't disagree with some of what you have said. Indeed my post emphasised the importance of "the". What I said was that if there was a property put up for sale, a purchase fell through and a second buyer then completed, that is a single process of disposal and abortive costs could be allowed. If however the property was taken off the market and advertised again some time later, the costs would probably fail because it was a new / separate process.
I have difficulty with the argument that my interpretation is wrong but some costs can be claimed (because they would have been needed for a sale). I don't think you can have it both ways.

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By sammerchant
10th Jun 2020 17:38

Thanks to all who replied. I think I had better see what the abortive costs comprised. And I agree, the article 'the' sale is crucial. If there was no disposal, then the abortive costs died with the negotiations.

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Replying to sammerchant:
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By whitevanman
11th Jun 2020 22:27

Forgive me if I am "trying to teach grandma.." I have no idea how long you have been around!
It occurs to me that it might be of assistance if you are familiar with the reasoning behind CTM08260 (quoted in the OP).
It is in that part of the guidance dealing with Management Expenses.
Pre 2004, only a very limited class of "Investment companies" could claim such.
Whilst things have changed since 2004, the matters referred to in CTM08260, have remained the same.
Costs of managing investments were allowable and that would include consideration of changing investments.
The costs incurred in connection with a sales process were, however, considered capital, being part of the costs of disposal etc.
For Investment companies, it was therefore important to decide when the sales (or purchase) process started (costs incurred earlier would be allowed as Management Expenses).
The divide is explained in the guidance you quoted. Essentially, once you have decided to sell and then take the steps necessary to put that decision into force, the costs incurred are capital costs.
Applying the same logic, if you decide to sell an asset and then incur costs on valuations, legal etc, those are costs of "the disposal". In my opinion, it does not matter if there are one or more abortive sales in the same process. The costs incurred are costs of "the disposal". They would certainly have been capital under CTM08260.
Taking the simplest example, I put my house up for sale, you offer to buy but pull out at the last minute. The property continues to be advertised and a second buyer then completes a purchase. IMHO, my legal costs etc in connection with each of these "transactions" are costs of "the disposal". The same logic would result in costs of the type mentioned by DJKL being allowable without the need for a contradictory interpretation (see my last post).
The position would be different if, after you pulled out, I took the property off the market but then re-advertised and sold some time later (a wholly separate process).

I know others have not agreed my view but as I have said, there is nothing in HMRC guidance or S38, to suggest I am wrong (other than how one chooses to interpret "the disposal") and in fact, CTM08260, properly understood, would seem to support me.

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Replying to whitevanman:
Psycho
By Wilson Philips
11th Jun 2020 22:49

If only to play Devil’s Advocate:

I incur legal costs in negotiating with a potential buyer. Said buyer pulls out and I incur exactly the same legal costs negotiating with a second buyer who proceeds to purchase. In my view it is a perfectly reasonable argument that the first legal fees have nothing whatsoever to do with the actual sale. They are costs incurred in respect of something that never happened.

It’s also worth pointing out that the guidance referred to is concerned only with making a distinction between revenue and capital. The mere fact that you’ve decided that expenditure is capital doesn’t make it allowable.

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Replying to Wilson Philips:
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By whitevanman
12th Jun 2020 03:11

I don't disagree with what you say. My original post postulated a possible interpretation of S38 and concluded that I would be interested to hear HMRC's take.
That remains my view.
To some extent I was drawn towards the alternative by comments made by yourself, DJKL and 1 or 2 others, about costs you considered should be allowed.
To, hopefully, explain:
S38(1) sets out that only certain costs may be deducted in calculating the gain on the disposal of an asset. S38(1)(c) includes in this category, incidental costs of "making the disposal". This is further defined in subs (2) as being expenditure of certain types, incurred "wholly and exclusively" "for the purposes of the disposal".
If you take the more restricted view of "the disposal" as being the particular transaction that results in a completed sale, that would mean that costs of the type referred to by DJKL et al, might not in fact, be allowable.
Simply put, they were incurred W&E for the purposes of the abortive sale and cannot therefore be W&E for the final, completed, transaction (however useful or even if they save duplicated costs).
But clearly, several contributors believe such costs should be allowed (including me).
So what interpretation might allow what many see as perfectly proper, allowable, costs? The answer is, one which does not restrict the interpretation to the actual transaction but covers the whole process of the sale. So, you advertise a property for sale and eventually sell it. Costs incurred between the 2 dates on relevant services are allowed and that inevitably includes any costs of an abortive sale. These are after all, costs incurred W&E for the purposes of the disposal (of the asset).
I consider the guidance at CTM08260 to offer some support, not because it defines capital expenditure, but because it indicates what HMRC consider to be "the costs of making a disposal". It includes all the costs incurred after the decision to sell (and if I remember correctly, which are of the type ordinarily incurred in a sale).
This would apply only to a single "process" of sale. If a property is taken off the market and re-advertised some time later, that is a whole new "process" and earlier costs cannot be claimed. Again this follows from the HMRC guidance about the decision to sell etc.
So I would repeat, there are some points raised that are far from clear and some doubt about what we consider should be allowed and what might, strictly, come within the Act. HMRC does not appear to have published guidance on what it considers to be the correct interpretation, so it would be good to have their views.

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Replying to whitevanman:
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By Tax Dragon
12th Jun 2020 07:43

I wish you hadn't said

whitevanman wrote:

So what interpretation might allow what many see as perfectly proper, allowable, costs?

in the middle of your thesis, because there is not a court in the land that would ever ask that question. It might even be seen as betraying a wrong mindset, placing your own judgment of what 'ought to be' the rule above what the rule might actually be.

I agree with you that DJKL seems to have done exactly that, too. He should probably have claimed all or nothing, under the rule.

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Replying to Tax Dragon:
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By whitevanman
12th Jun 2020 08:09

The courts have done exactly that when considering the interpretation of legislation that gives absurd results (recent case on PPR for example).
I don't have a fixed view of what "ought to be", rather I hope I am able to figure out what the average person would consider should be allowed in a typical case.
In that connection, DJKL (and others) is (are) probably correct. Sadly, on what to now seems to be the accepted interpretation, they are wrong.

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Replying to whitevanman:
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By Tax Dragon
12th Jun 2020 08:26

Dismissing the absurd hardly equates, does it?

Are you sure this question hasn't been tested? I'll have a little look later, see if I can dig something up.

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Replying to whitevanman:
Hallerud at Easter
By DJKL
12th Jun 2020 10:36

I do defer to all of you re your understanding of tax, but may I introduce a small thought experiment as the conclusions from your discussions do jar.

If we view an invoice received for professional services as mere token for the various services rather than a provision of merely one service, there are a number of underlying services within said invoice, and some of these can be seen and demonstrated to have been used towards the first sale and thereafter used towards the second sale, whilst there is an issue with W & E we are quite happy, in fact HMRC guidance often illustrates, to in other circumstances split costs on a just and equitable basis- the most obvious is private use of cars but there are plenty of others.

I appreciate that here we are dealing with capital gains not trading income but I really struggle with the idea of an all or nothing.

I appreciate also that this is not the same, but say I am a builder constructing an office for own use, I incur costs on timber, I incorporate the timber, part built office then blows over in a gale and I am not insured, I give up building office, salvage some of the timbers from the site and use them for Mrs Ferguson's loft extension down the road. Now the timbers re transaction one are a tax nothing, no completed property, but would you object to a "change" of purpose re these and a deduction for some of the timber against the Ferguson loft extension, I certainly use them in it, not initially but subsequently?

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Replying to DJKL:
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By Tax Dragon
12th Jun 2020 10:51

"The trade" is ongoing. "The disposal" happens only once, even if those words mean "the process of disposing", which is the point Wilson and Vannie have been discussing. (Oh, and "purposes" is plural. If that makes a difference [it might not, this is getting too legalese for me!])

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Hallerud at Easter
By DJKL
12th Jun 2020 10:57

"You should allow a deduction for fees paid to a professional adviser only to the extent that they are directly referable to the cost of acquiring or disposing of each particular investment."

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15280

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Replying to DJKL:
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By whitevanman
12th Jun 2020 18:35

Doesn't really take us any further as what we are considering what is "the disposal".
As to your comments re W&E it is possible that an expense can be apportioned but only if some clearly defined part was incurred W&E for the relevant purpose. Not all expenses come within that. For example you cannot apportion the costs of a flight or a meal. Similarly, if you pay legal fees in connection with an abortive purchase/sale you cannot then say that some part of that expense was incurred W&E for the purposes of a later, successful transaction. We might not like it but that is the inevitable result if "the disposal" relates only to the final, successful, transaction.

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