Is Property Sale Indemnity Insurance CGT Allowable

Conflicting Website Conclusions On This Common Expense - TCGA 1992 s38 (1)(c) and (2)

Didn't find your answer?

 

The point of my query is hopefully to have this subject thrashed to death on AWeb in order to distil the correct CGT treatment of indemnity insurance on property sales completion statements.

Just perusing a recent house sale completion statement and note there are 2 indemnity insurance costs. I thought I would just check my textbooks on the subject as well as several website commentaries. It appears many tax practitioners have also wondered about the correct CGT treatment for these insurance costs on sale. This is not surprising since the tax training manuals only seem to cover standard solicitors costs on disposal without going into any great depth. There appears to be two camps of opinion on this matter, namely:

1) just allow solicitors costs plus ordinary disbursements and disallow indemnity insurance, because it seems from a reading of TCGA 1992 s38 that sale costs of insurance are not specifically allowed.

2) allow all costs on the sale completion statements, apart from the obvious mortgage repayment and anything apportionable to revenue, because everything else has to be a CGT cost of sale.

The annoying thing is, why in the first place is there such confusion over what must be a very common cost to appear on completion statements.

I think what must give some practitioners "cold feet" is the mention of "insurance" on a completion statement.

The HMRC Manual covers incidental expenditure at CG15250

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15250

What is of slight interest is that on the following page CG15260 HMRC confirm that the incidental costs of disposal of a chattel also include the cost of insurance in transit to an auctioneers premises. So, insurance can in principle be allowed on a disposal in certain situations. But what about indemnity insurance.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15260

The recent completion statement mentions two indemnity insurance costs. They are in the region of the following amounts:

Indemnity Insurance Building Regulations (FENSA) £20

Indemnity Insurance Missing Deeds £70          

You can immediately see that the worry of missing deeds is far greater than the worry of replacement doors and windows being illegal (FENSA).

It also appears that the house could be sold without the above insurance being paid, although I suspect prospective purchasers would be more concerned about the missing deeds scenario.

Legal website comments explain that indemnity insurance is paid during the conveyancing process in order to speed up the process when important documents are missing. It also appears to be a very common expense. To my mind it is clear that indemnity insurance must therefore be  some form of cost of conveyance, since it ensures that the conveyance of the property is achieved.

(I think a previous AWeb post alludes to completion statements not charging VAT on indemnity insurance as being an indicator of non-CGT allowability, but maybe this is due to there being no VAT on insurance generally).

The sticking point must then be TCGA 1992 s38 (2) which refers to "costs of transfer or conveyance". The indemnity insurance must surely be a cost of conveyance, but does it satisfy the "wholly and exclusively" test mentioned near the beginning of s38 (2).

For what reason other than the disposal then would the indemnity insurance have been incurred. I can think of none.

To put it simply, the vendor wanted shut of the property and paid the solicitor or conveyancer a small amount of money to plug a hole in the legal paperwork so as to get a move on with the job.

In view of the above I am minded to allow the two indemnity insurance costs for CGT.

Please let me know if you agree or disagree with my view. It would be great to have a unanimous agreement on the CGT treatment either way in order to put this matter to bed once for all time

 

Replies (7)

Please login or register to join the discussion.

paddle steamer
By DJKL
14th May 2024 13:11

Never seen them used to speed process, only seen them used as a last resort. There is a lot of work with say title indemnity (certainly up here), solicitor has to prepare report on title for insurers etc to get a quote, have even seen Counsel's Opinion sought.

I would tend to allow such costs , for one thing presume you are not apportioning legal costs incurred researching the title so why disallow the outlay that results from this legal work (suspect legal costs far outweigh any premiums paid)? Also when we have paid costs have tended to be between £500-£1,200 rather than say £70.

Thanks (1)
By Ruddles
14th May 2024 14:06

How would you treat the insurance proceeds if there were a claim?

Thanks (0)
Replying to Ruddles:
paddle steamer
By DJKL
14th May 2024 15:08

The seller of the property who purchased the policy tends never to receive anything, the buyer of the property acquires the policy when he purchases the property. I guess he has some form of partial disposal if he/she has a claim, but I have never been in that position.

Thanks (1)
Replying to DJKL:
avatar
By FactChecker
14th May 2024 17:57

Warning: I speak of which I know naught (even more than sometimes before anyone wants to interject at that level), but I'm surprised that "The seller of the property who purchased the policy tends never to receive anything".
Is that generally the case, or specific to commercial (or Scottish) scenarios?

I'd always assumed (TD just growled) that the seller paid for the policy and was the beneficiary - on the basis that, when whatever insured disaster occurs, the purchaser has standard recourse against the seller (who therefore needs the insurance payout to meet their liabilities).

As always, happy to learn - especially where another untested assumption is put to the sword.

EDIT: with apologies to Penelope, who has produced there exactly the kind of question for which this site is meant to be used - and so deserves better than my off-piste maunderings.

Thanks (3)
Replying to FactChecker:
paddle steamer
By DJKL
15th May 2024 09:37

The policies I believe run to eternity (sit with title), claim could be in a hundred years time, tying this to original seller ,who is long gone, would likely not really work.

This article by Anderson Stathern comments (but, this could just be in Scotland, we are different)

https://www.andersonstrathern.co.uk/insights/title-indemnity-insurance/

Thanks (1)
avatar
By More unearned luck
14th May 2024 21:50

"1) just allow solicitors costs plus ordinary disbursements and disallow indemnity insurance, because it seems from a reading of TCGA 1992 s38 that sale costs of insurance are not specifically allowed.

"2) allow all costs on the sale completion statements, apart from the obvious mortgage repayment and anything apportionable to revenue, because everything else has to be a CGT cost of sale."

1) is the more correct statement. 2) is twaddle.

Thanks (1)
Replying to More unearned luck:
paddle steamer
By DJKL
15th May 2024 10:17

Neither- I go for 1 but allow the cost of the indemnity policy which is itself an asset and transfers with the property.

I suspect, in the event of a future claim, the proceeds would be a partial disposal of the asset, the say title defect possibly reducing the value of the asset purchased and the policy reimbursing same.

In addition I suspect I could postulate that what is sold is the asset, property, and the indemnity policy, so part of the consideration ought to be apportioned to each head sold. (I don't, I think it is a composite sale)

Also HMRC guidance here gives a steeer-

"expenditure wholly and exclusively incurred by him or her in establishing, preserving or defending his or her title to, or to a right over, the asset."

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15180

38 (1) (b)"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,"

Thanks (1)