Capital gains tax

Allowable expenses against capital gain on rental property

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I have a client who owns a rental property. He has provided a list of expenses from the last year before sale when the property was vacant. He has put a new kitchen in, new carpet in and carried out gas and electrical safety checks in order to get it ready for sale. Are these expenses allowable against capital gains tax?

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By Montrose
26th Sep 2017 00:25

The basic rule as to whether expenditure is allowable is in TCGA 1992 s38(1)b which allows as a deductible expense:-"the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset,"

On that basis all the specific expenses listed appear allowable- assuming they have not already been claimed as allowable deductions from rental income !.

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By Ruddles
26th Sep 2017 10:03

New kitchen - probably (assuming it is fully fitted)

New carpet - very unlikely

Safety checks - very unlikely

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By SteveHa
26th Sep 2017 09:28

Has he/she not had annual gas safety checks and already claimed a deduction against the rental income?

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By Montrose
28th Sep 2017 19:35

I am not sure I agree with Ruddles on the carpet- this is not an SDLT or VAT matter.
If a clean new carpet helps sell the property its purchase is incurred for the purpose of enhancing the value of the property, and in place it is reflected in the state or nature of the property.

Subject to what SteLacca says, assurance for the purchaser that the electrical and gas fitments are safe enhances the saleabilty and so should be allowable as well, but there must be some doubt whether the costs would be disallowed because of the very narrow provisions of TCGA s38(2)(b)

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Replying to Montrose:
By Ruddles
29th Sep 2017 07:55

Safety checks do not involve expenditure ON THE ASSET and do not in themselves enhance the value of the asset - nor would the cost of the check be reflected in the state of the asset. If the checks simply confirm that everything is in order, then that is all they do. If the result of the checks were that remedial works were required then such expenditure would undoubtedly be revenue in nature (and therefore disallowable under s38(2)(b)). And in any event, the cost of the checks - regardless of the results - would be revenue. So again disallowable under s38(2)(b)

Likewise, expenditure on a new carpet is unlikely to be expenditure ON THE ASSET. Whether the floors are bare wood or carpetted, the condition of the property which is the subject of the sale is the same. The correct route to securing a 'deduction' for the carpet is for buyer and seller to agree an apportionment of the sale price between heritable and furnishings etc.

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