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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Good luck! Sounds like a real can of worms.
https://www.legislation.gov.uk/ukpga/1992/12/section/38/enacted
Transfering from Fixed assets to Stock
Were they transferred over at cost plus all improvements?
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.
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.
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!
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?
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.
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.
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.