Share this content
64

Capital gains tax on disposal of let property

Can client claim against CGT for redecoration to make the house saleable?

Didn't find your answer?

New client had let a house over many years. After the tenant left, he decided to sell and had to bring it up to saleable condition, including re-wiring, redecoration and new window blinds.

Can all of the expense be offset against CGT, or just the structual work?

It was not let after the restoration work was done, and none of the above was claimed for against letting income.

Replies (64)

Please login or register to join the discussion.

avatar
By Tax Dragon
14th Nov 2019 13:01

A repair does not become an enhancement just because income tax relief was not obtained for the cost.

Specifically, see s39(1) TCGA 1992.

Thanks (0)
avatar
By The Dullard
14th Nov 2019 13:36

Although, you might find the tribunal's decision in Day & Anor helpful:

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

Essentially, the tribunal considered that, because the taxpayer's (acting commercially) only purpose in carrying out the work was to achieve as a high a price as possible, it was presumed to have enhanced the value and be reflected in the state of the asset at the time of disposal.

The tribunal didn't consider s 39(1), but those same assumptions would have made the expenditure capital, rather than revenue, in nature, I think.

For the avoidance of doubt, I am talking about the £1,200 of painting costs in relation to 52 Blenheim Way in the decision. Paras 138-151

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 13:53

It's worth noting that 52 Blenheim Way was bought on 16 June 2006 and sold on 18 August 2006. Law Shipping, and all that.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 14:43

And if the OP's client stopped renting their property on 16 June 2016 (it having been in pristine condition when it was first let) and sold it on 18 August 2016?

Is the expenditure incurred after the letting ceased and prior to disposal revenue in nature or capital in nature. Law Shipping and all that.

That was the period during which the intention to "do it up and flog it" was formed, in the same way that Day and friend did the self same thing; just without ever renting it.

The point validly made in Day (and applicable in both Law Shipping and Odeon Associated Theatres) is that purpose also goes to whether an expense is capital or revenue. Is the purpose to have more of an asset or just keep the asset in a suitable condition for continued use?

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 14:48

My gut says revenue (it agrees with my lupine friend); my experience of you suggests otherwise.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 15:06

The proposition in Law Shipping is that if we acquire an asset and spend money on it immediately after acquisition before we can use it, and the need for that expenditure is reflected in the price, then the expenditure is capital.

If you turn that around. We have an asset that we no longer wish to use. In order to achieve a better price we spend money on it, and in consequence of that expenditure achieve that better price (we assume, because, acting commercially, why else would we have spent that money).

If instead we didn't spend the money, and accepted a worse price, our purchaser would then need to spend the same money before using the asset, and that same expenditure would be capital. N'est-ce pas? But you say when we spend the money it's revenue.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 14:56

Oh. You have done your trick of expanding your answer while I responded to the unexpanded version.

I take your point, and if the OP wanted to be particularly bloody minded s/he might want to construct an argument, but I can't see it getting past s39(2). The fiction there would seem to apply to the OP's situation in a way it would not have applied to Day and friend.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 15:15

Why does the fiction apply differently to Day and friend? It's the same fiction.

EDIT: Did Day and friend incur the expenditure immediately after acquisition or immediately before disposal, do you think?

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 15:09

Tax Dragon wrote:

Oh. You have done your trick of expanding your answer while I responded to the unexpanded version.

It's not a trick. I just sometimes press post a bit prematurely

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 15:29

The distinction we all grew up with is whether the dilapidation occurred during your ownership. Making good your dilapidations, revenue; making good inherited (/purchased) dilapidations, capital. Where in the judgement in Day & friend does the tribunal override this old rule? Indeed, if it did so, it probably overstepped its authority.

Thanks (0)
Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
14th Nov 2019 15:47

Tax Dragon wrote:
Making good your dilapidations, revenue; making good inherited (/purchased) dilapidations, capital.

My point, more succinctly put.

Edit: My long winded post seems to have disappeared???

Thanks (0)
Replying to Lone_Wolf:
avatar
By Tax Dragon
14th Nov 2019 15:59

Lone_Wolf wrote:

My long winded post seems to have disappeared???

Lone_Wolf wrote:

I have a similar problem, albeit not with posting.

I love a good irony, me :-)

Thanks (1)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 15:49

Yes, but the distinction we all grew up with was based on our continuing to use the asset, as occurred, most notably, in Odeon and Conn v Robins Bros. The only case law that we have where repair type expenditure has been incurred at the beginning of ownership and we obtained a lower purchase price, and HMRC have seduced us with the fact that we can claim relief for such expenditure during the currency of our ownership.

Take the Law Shipping concept into your mind, and then re-read s 38(1)(b). The tribunal in Day concluded that the test in s 38(1)(b) - which I put to you is essentially an end of ownership Law Shipping test - was satisfied.

I am a lessor of ships. One of my lessee's has just returned one of my ships in a shocking condition - its not even sea-worthy anymore - and it also happens to be a type of ship that I no longer want to offer for lease. Therefore, I'm going to sell it. That is my new intention. If I sell it as it is though, I'm going to get a next to nothing. I have the facilities to recondition it, and so I spend £500,000 reconditioning it in consequence of which I manage to sell it for £800,000. You're letting me have relief for the £500,000 against my continuing leasing profits (rather than as a deduction from the £800,000 on sale) are you?

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 16:08

It's not a question of whether it satisfies s38(1)(b) (that was never in doubt); it's a question of whether it falls foul of s39.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 16:30

My point is that s 38(1)(b) is essentially an inverse Law Shipping, which goes to the question of whether or not it then falls foul of s 39(2).

Thanks (0)
Replying to The Dullard:
Psycho
By Wilson Philips
14th Nov 2019 16:16

The Dullard wrote:

You're letting me have relief for the £500,000 against my continuing leasing profits (rather than as a deduction from the £800,000 on sale) are you?


Actual relief from trading profits is not a pre-requisite. 39(2) is a hypothetical provision. The proper question, as I put earlier, is "If I were to continue to use this ship as an asset in my ship leasing business, would I claim a revenue deduction for the reconditioning expenditure?"
Thanks (0)
Replying to Wilson Philips:
avatar
By The Dullard
14th Nov 2019 16:29

Where in s 39(2)'s fiction does it impose the assumption that use is continuing?

It essentially asks if during our period of ownership revenue relief would have been obtained for the expenditure.

We know that we wouldn't have got relief for it if we incurred the expenditure at the beginning of our ownership, and we incurred the expenditure for the purposes of bringing it into use, having purchased it at a lesser price, because of the need for the expenditure.

We know that we would have got revenue relief for it if we had incurred it during our ownership and then continued using it.

Why though should we obtain revenue relief for expenditure that is incurred right at the end of our period of ownership, but which has not been incurrred for the purposes of our continued use of the asset, but for the purpose of disposing of it at a higher price. The fact that there's no case law on the point to say that it's capital expenditure doesn't make it revenue expenditure.

Thanks (0)
Replying to The Dullard:
Lone Wolf
By Lone_Wolf
14th Nov 2019 15:49

The Dullard wrote:

It's not a trick. I just sometimes press post a bit prematurely


I have a similar problem, albeit not with posting.

Isn't the distinction that when Day purchased the property, it was purchased in a state of disrepair, whereas in the case of the OPs client, it was not (we assume - if it was the answer may change).

So Day purchased a property valued at a depressed level. Him incurring the painting costs increased the value of the property from the point he acquired it, and so was allowed as enchantment expenditure. His property wasn't decorated to a reasonable standard, so incurring such work improved the value.

The OPs client has acquired a property which we assume was in a decent state of repair, let it out for a time, during which wear and tear is going to necessitate repair work to maintain the property to it's original standard. His property was already in a decent state of repair, and required work to maintain that level, and so it is just repair work.

The fact they've changed their intention from wanting to rent it out, to wanting to sell it, doesn't change things for me. We don't then look at the state of the asset at the point they change their intention, and judge the work from that point (unless we're appropriating it to stock, but that's not what we're talking about here). You still judge the work done based on the state you originally acquired it.

Had he sold it without the work, and the work was carried out by the purchaser, then that would have been enhancement expenditure in the hands of the purchaser, as they have improved the asset from the condition they acquired it in.

The fact that it would have been revenue in the hands of the seller, but capital in the hands of the purchaser, doesn't change this IMO. Plenty of transactions can represent revenue in the hands of one, yet capital in the hands of the other.

Thanks (0)
Replying to Lone_Wolf:
avatar
By Tax Dragon
14th Nov 2019 16:10

My point, explained.

Thanks (0)
Replying to Lone_Wolf:
avatar
By The Dullard
14th Nov 2019 16:51

I hate this format! I can't follow what's gone on!

The consideration is whether the expenditure is disallowed by s 39(2); which it will be if it's revenue expenditure and won't be if it's capital expenditure.

Expenditure incurred at the end of ownership of a capital asset for the purposes of disposing of the capital asset at a better price seems to me as much capital as expenditure incurred at the beginning of ownership in consequence of and to rectify defects that resulted in a purchase at a lesser price.

There is no revenue purpose for the continuing business (if indeed it is continuing) of repairing an asset that is no longer required.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 17:02

The Dullard wrote:

There is no revenue purpose for the continuing business (if indeed it is continuing) of repairing an asset that is no longer required.

Agreed. But Law Shipping tells us that a "revenue purpose" does not make initial expenditure revenue. You want to "invert" (your word) Law Shipping. Let me suggest that the outcome that gives is that a "capital purpose" does not make repair expenditure capital.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 17:09

So you think I should claim revenue relief for my ship repair?

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 17:17

TBH I think you should sue your lawyer for crappy terms on the lease.

But you are conflating the question with actual income tax relief; as Wilson said above... below... erm, previously, anyway, s39(2) does not consider the reality (that's dealt with at s39(1)) - ss2 concerns itself with a pure fiction.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 17:31

So, when considering s 39(2), Law Shipping applies at the beginning of the period of ownership, but expenditure incurred at the end of the period of ownership solely for the purpose of achieving the best possible price, is assumed for the purpose of s 39(2) to be expenditure incurred during the currency of use. I think you're trying to make the fiction more fictitious than it is.

I don't see anything in the s 39(2) that requires that in determining whether revenue relief would have been obtained for expenditure one is required to ignore when in the period of ownership the expenditure was incurred (hence I accept that Law Shipping can apply at the beginning of the period of ownership to prevent expenditure falling foul of s 39), why it was incurred, nor the (intended) effect of it being incurred (which might similarly prevent it falling foul of s 39).

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 17:53

The reality is that you have decommissioned the ship.
The fiction is that you haven't.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
15th Nov 2019 10:50

Tax Dragon wrote:

The reality is that you have decommissioned the ship.
The fiction is that you haven't.

Perhaps I've appropriated it to trading stock, and it's implicitly worth £300,000, given that I can sell it for £800,000 after spending £500,000 on it? ;)

Thanks (0)
Replying to The Dullard:
Psycho
By Wilson Philips
14th Nov 2019 19:42

The premise of Law Shipping is that expenditure incurred to bring an asset into a usable state is part of the acquisition cost.

The premise of expenditure incurred on repairs during or at the end of trading is for the purpose of making good dilapidations arising from trade use of the asset. HMRC are quite happy to allow such expenditure as a revenue deduction so you would effectively be trying to argue that HMRC are wrong in allowing such a deduction.

Let me rephrase my earlier question -

You have premises used for a trade. The trade continues but the premises are surplus to requirements so you decide to let it out, spending a wad of cash on redecoration etc. to improve rental yield.

Straw poll - how many would seek a trade deduction for the expenditure and how many would treat it as capital in the hope that it would still be reflected in the state of the property on eventual sale?

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 17:03

The Dullard wrote:

I hate this format!

Agreed.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
14th Nov 2019 15:36

Back to our favourite legislation! I am inclined to agree with you. One needs to ask oneself the question:

"If I were using the asset for the purposes of a trade, would I be trying to secure a revenue deduction for the expenditure?" The answer to that question should go a long way to concluding the point. FTT decisions are often overturned and, IMO, the judge was wrong not to consider 39(2) in "Blenheim".

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
14th Nov 2019 15:44

Wilson Philips wrote:

IMO, the judge was wrong not to consider 39(2) in "Blenheim".

Well, maybe.... but if it was capital per Law Shipping (the dilapidation having been bought, so to speak), then maybe not. Although s39(2) itself does not distinguish between capital and revenue, that distinction is implicit in the fiction. The examples in CG14300 are interesting, in that context.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
14th Nov 2019 16:09

I don't disagree, although think that a fuller (and proper) analysis would at least have considered 39(2) and concluded that it did not apply because of Law Shipping.

Thanks (0)
Lone Wolf
By Lone_Wolf
14th Nov 2019 14:37

What state was the house in when it was purchased? Did it need all that work done to it at that stage?

The fact he had a tenant in suggests not but who knows.

If not, and it was only over the years of use that the work became required, then it suggests that it is repair work, putting the asset back to it's original state, rather than enhancing its value. As Tax Dragon points out, TCGA 1992 s39(1) is relevant as I suspect that the expenditure would be allowable as a repair against the rental business.

The time period in the Day & Anor case is significant I'd say as a sale just over 2 months later suggests that the painting works were required at the point of purchase, and so could be said to enhance the value of the property from it's initial purchased state.

Thanks (0)
avatar
By The Dullard
14th Nov 2019 15:53

In the OP's case, does anybody think the client can get relief for the expenditure against the rental income? Presumably it was incurred after the tenant had vacated.

Thanks (0)
Replying to The Dullard:
Lone Wolf
By Lone_Wolf
14th Nov 2019 16:05

I wouldn't be against arguing that the property business doesn't cease until the property is disposed of, or is taken into use for another purpose.

So, yes, I think they could get relief against the rental income. May be a moot point though if it was incurred in a different tax year to the final rental payment.

HMRC would probably disagree with this interpretation though...

Thanks (0)
Replying to Lone_Wolf:
avatar
By Tax Dragon
14th Nov 2019 16:11

Purpose being key.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 16:31

Bing!

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
14th Nov 2019 16:43

For the avoidance of doubt, I was referring to purpose because this word is used in s34 ITTOIA.

You (I believe) are arguing that purpose can be used as a test of whether expenditure is revenue or capital. As far as I know, that is a new argument (I salute you for it).

Your argument though is not furthered by consideration of s34 and it doesn't help to conflate the sections. I'm not convinced that Day assists your case, because Day can rely on Law Shipping as it stands; you want to apply Law Shipping (not Day) in a new and creative way.

You've just sold a ship for £800,000. Take your claim to court. I will watch with interest.

Thanks (0)
Replying to Tax Dragon:
avatar
By Tax Dragon
14th Nov 2019 16:49

I've left a word out... so I'll clarify. I mean expenditure on restoring an asset. (It's obvious from the context of the comment, but I'll make it express anyway.)

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
14th Nov 2019 16:58

Well, I simply made the assumption that when spending money on something that you no longer want for your business, if expended commercially, the purpose of the expenditure and the effect of the expenditure (which is what determines whether or not it is capital expenditure) are the same.

Thanks (0)
Replying to Lone_Wolf:
By SteLacca
14th Nov 2019 16:16

Surely the letting business ends when the tenant leaves unless the property is then marketed for re-letting.

Thanks (0)
Replying to SteLacca:
Lone Wolf
By Lone_Wolf
14th Nov 2019 16:35

That's one view, and is probably what HMRC would argue.

The argument clearly becomes a bit harder to maintain the longer the property is not sold, if it is not also marketed for re-letting, but the facts of each case will determine whether or not it is reasonable to claim the expenses.

Thanks (0)
By Red Leader
14th Nov 2019 17:11

And that dear questioner, is your answer. Clear?

Thanks (2)
Replying to Red Leader:
avatar
By Tax Dragon
14th Nov 2019 17:27

TBH I can't see what part of re-wiring, redecoration or new window blinds counts as "structual" anyway. We've addressed only the easy part of the question! :-)

Thanks (0)
Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
14th Nov 2019 17:29

There's parts of my house that I'm sure are being held together by the paint and wallpaper, so it may be that part.

Thanks (0)
Replying to Lone_Wolf:
Hallerud at Easter
By DJKL
14th Nov 2019 20:23

We had a wall like that, first room I decorated when we moved in, stripped the wallpaper and most of the horsehair plaster, likely dating from about 1869, deposited itself on the floor- since then have only ever stripped one wall in the upstairs part of the house.

Note you all had an exciting time today but curious to ask whether you would vary some of the points made if we knew the client had other let properties which he continued to let (a letting business)?

Thanks (1)
Replying to DJKL:
Lone Wolf
By Lone_Wolf
14th Nov 2019 21:39

The more I decorate, the more I discover the house is falling apart in places. We know the old couple that owned it before the people we purchased it from. Nice old fella, but he took on a lot of work that he was in no way qualified to, and now as I try and update my home I discover more and more it's like the house that jack built.

As to your second point, if the client had other letting properties then there would be no doubt in my mind that the expenditure could be claimed against the rental business. The doubt only arises if it's the final letting property, and you then have the debate as to when the rental business ceases.

Thanks (0)
Replying to Lone_Wolf:
avatar
By Tax Dragon
14th Nov 2019 23:11

By that logic (which, I accept, has been endorsed in this forum previously), you would allow The Dullard his £500,000 as an allowable (revenue) expense - despite his protestations, of course, that it was really capital.

Thanks (0)
avatar
By whitevanman
14th Nov 2019 23:51

Late to the party as usual but might as well add my two pennorth.
The important point in Law Shipping was that the ship could not continue to be used in the trade without the "repairs" being made, shortly after purchase AND there was evidence that the purchase price was significantly less as a result of this want of repair. Accordingly it was held to be capital expenditure.
The decision in the case of Day etc is possibly a little bit questionable but the FTT considered that the property had been bought with the intention of it being done up and sold. Also, they noted the large profit and short period of ownership. These points led them to conclude that the decorating etc had met the S38 test (s39 was not raised by anyone). Also, hmrc accepted that the "first part of s38" was met but seemed to argue that the expenditure was not reflected in the state of the property at sale (with some half-hearted reference to capital). Hardly surprising therefore, that the FTT reached the decision they did.
In the case of the OP's client, I very much doubt that the expenditure would fall to be treated as capital under the Law Shipping decision if it had been incurred by the purchaser (in due course). It is unlikely that expenditure of the type referred to would significantly affect the selling / purchase price and there is nothing to say the property could not continue to be used without the repairs being carried out. It would be allowable as revenue.
Similarly, I doubt it would fall to be treated as capital when incurred by the vendor, assuming a "reverse timing" Law Shipping (for the same reasons). It would certainly fall foul of s39 (as others have said).
Finally, as to claiming relief for IT purposes, the expenditure cannot have been incurred for the purposes of the letting business once that business has ceased. It may indeed be a different matter if the facts were different but then, isn't that always the case?

Thanks (0)
Replying to whitevanman:
avatar
By Tax Dragon
15th Nov 2019 06:32

The only point I would add (the rest having been done to death) is that, if memory serves, in Odeon (contrary to what The Dullard said) the purchase price was not significantly lessened by the state of (dis)repair of the... theatres? Cinemas? The thing(s) bought, anyway. If I'm right on that detail (I suppose I should check before I post, but I want to do some work today!), and if that factor was a significant point in the conclusion of the court, then I wonder really how useful the decision is as a precedent - because it's quite an unusual set of circumstances not often reproduced.

Oh, and finally... in my immediately preceding post to Lone Wolf, when I said "would treat" I probably meant "should treat" or "would have to treat". Or maybe even "would you treat", as I suspect I meant the comment as a question, but misworded it. As I often do, when thinking of more than one thing at a time!

Edit... I've done it again (sigh)... for "treat" above, read "allow".

Thanks (0)
Replying to Tax Dragon:
avatar
By whitevanman
15th Nov 2019 08:06

You are quite right about the Odeon case. The main differences between it and Law Shipping were that:
There was no evidence the purchase price was affected by the state ( on the contrary it was felt all cinemas were likely in a poor state due to the war!); and
The cinemas could continue to be used as such without the repairs (same reasons).

Thanks (0)

Pages

Share this content