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Property improvement costs Limited Company.

Limited Company disposal of rental property

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Hi,

 My new employer is a limited company which has just sold a residential property it had been letting. Over the years it has capitalised improvement expenditure on this property, not all of which I am happy would be allowable for CGT if that was the tax the company was paying and some of it is difficult to identify the exact nature of the expenditure anyway. My question is - is this expenditure on fixtures, fittings, etc completely disallowed or is it allowed as trading expenditure or by some other means..It is 30 years since I qualified and working in industry I have never come across this issue before. It is important because this is the first disposal of several the company plans to make as it changes it's business focus towards an area I am more familiar with. Not that I expected to be asked to do the full accounts and tax comps on my own anyway.

I should say that some expenditure has been charged to repairs and renewals over the years so somebody must have thought this expenditure was capital in nature, but there are many small invoices which had I been there at the time I might well have considered writing off. One example I came across for example was for a wooden garden shed..and the sort of thing I am concerned about are cosmetic improvements that I would not have thought an integral part of the building as such.

Also my predecessor moved the properties from Non current assets to inventories in the last accounts but made a claim (s161 tcga 1992) on the tax return submitted so that a chargeable gain did not arise on the transfer to inventory. Does this oblige me to treat the disposals as a chargeable gain or given its a property development company can I call these trading profits.

This job has not been as simple as I was led to believe

Any help would be greatly appreciated.

Replies (16)

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By David Ex
05th Jul 2022 16:15

Good luck! Sounds like a real can of worms.

https://www.legislation.gov.uk/ukpga/1992/12/section/38/enacted

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By Paul Crowley
05th Jul 2022 18:53

Transfering from Fixed assets to Stock
Were they transferred over at cost plus all improvements?

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Replying to Paul Crowley:
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By David Ex
05th Jul 2022 19:48

Paul Crowley wrote:

Transfering from Fixed assets to Stock
Were they transferred over at cost plus all improvements?

That’s what I wondered. It’s not a move that suddenly makes non-allowable CGT costs allowable trade deductions (is it?!). If that’s the case, I assume the CGT allowable cost rules are still in point.

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By More unearned luck
05th Jul 2022 19:47

Materiality is not a tax concept; for tax you can't treat capital expenditure as if it was revenue expenditure merely because the amount is less than your idea of what is material. I think that for tax purposes it was probably correct to capitalise the garden shed.
If materiality was relevant why is your measurement of it to be preferred to your predecessors?
Subject to any effect on the indexation allowance, unless you are suggesting that there should be no CT relief for some of the items you query how does reclassification make a difference to the tax due*?

*It would make a timing difference if you had trading losses b/fwd, which might become a permanent difference with the proposed changes in the rate of CT.

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Replying to More unearned luck:
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By David Ex
05th Jul 2022 20:02

More unearned luck wrote:

Subject to any effect on the indexation allowance, unless you are suggesting that there should be no CT relief for some of the items you query how does reclassification make a difference to the tax due*?

Allowable costs for CGT (and CT on CG, I think) are different from allowable trade expenses, I was thinking. That being the case, the no gain/no loss transfer to stock, should have reflects the CG treatment.

Of course, I may be talking nonsense!

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By Tax Dragon
05th Jul 2022 21:53

Not sure I'm understanding this any better than David, and I would agree his thought that items that don't (or didn't) increase the base cost also won't reduce the trading profit - first off, they're capital; second off, they weren't incurred for a trading purpose.

Have capital allowances been claimed/available on any of the costs you mention?

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By kevin050265
06th Jul 2022 12:48

Thanks for replying. The transfer was made at total costs to date (acquisition plus subsequent expenditure). I thought along with one of the respondents that items that may be allowable as trading expenditure may not be allowable against chargeable gains - hence the question.
So I had thought that if we can define the business as a property trading company then these could be costs of goods sold but if they are chargeable gains then the items that would not qualify as improvements to the properties don't get any relief at all? Or could they still be defined as trading losses to set off against the chargeable gains and other (rental) income of the company?
And has the election made committed the company to the chargeable gain route?

Thanks for your comments.

Kevin

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Replying to kevin050265:
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By kevin050265
06th Jul 2022 12:52

Should also have said the shed was just an example of many similar items. I believe the total is material.

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Replying to kevin050265:
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By kevin050265
06th Jul 2022 13:08

And no capital allowances have been claimed on these costs.

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By David Ex
06th Jul 2022 17:54

I think you've been dropped in it, to be honest. You're new to the business, poor accounting records, no information about the S161 election (rationale and calculations to demonstrate the effect) and you aren't familiar with this kind of thing.

If it was a one-off, you might feel it was possible to have a go but, from what you say, it isn't. Difficult, I appreciate, but you need to "push back" and suggest the business gets some specialist help so you can concentrate on your day job.

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By kevin050265
07th Jul 2022 08:32

Yes, you're right of course, been reading the subject and come to the conclusion these are chargeable gains as originally bought to let and change of circumstance led to the sale so the claim probably didn't do any damage but that leaves the identification and classification of the improvement costs which I cannot do. Also trading would be evidenced by budgets,board minutes eff none of which are present.

I will respectfully decline this task and tell them to get proper advice..

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Replying to kevin050265:
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By David Ex
07th Jul 2022 12:03

kevin050265 wrote:

I will respectfully decline this task and tell them to get proper advice..

Just emphasise it’s a specialist area that isn’t one of yours and better to get it right to avoid HMRC problems.

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Melchett
By thestudyman
11th Jul 2022 10:14

Difficulty with property CGT is the advancement of technology where even if its an "improvement" it can be acceptable as revenue expenditure. I can't remember which article I read, but they gave a great example of replacing single glazed with double glazed windows.

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By kevin050265
14th Jul 2022 10:54

Hello, told them to seek proper advice, so not my problem any more, but just for my own curiosity, if a Limited Company spends money on a property which does not qualify as an improvement cost, is it the combined view that no relief at all is available for that expenditure or could an argument be made that these are allowable as trading costs?

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Replying to kevin050265:
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By Tax Dragon
14th Jul 2022 11:10

I've already answered that. Capital costs are not revenue expenses.

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By kevin050265
14th Jul 2022 10:54

Hello, told them to seek proper advice, so not my problem any more, but just for my own curiosity, if a Limited Company spends money on a property which does not qualify as an improvement cost, is it the combined view that no relief at all is available for that expenditure or could an argument be made that these are allowable as trading costs?

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