Claiming receipts for capital gains

[peabottle]

Hi everyone,

We had a detached house let out as 2 flats since 1992.
In 2004 the tenant of one flat moved out, we decided to do major alterations, changing the layout regarding kitchen/bathroom/ lounge, moving the boiler radiators etc.
In 2005 my tenant in the other flat moved out, we decided that flat also had to be modified, same procedure as the other flat.
Due to the time it was taking for the on going work, we decided to move into the property. Therefore letting out our main home in 2005. In 2008 we started to extend both flats, furnished, completion of the works in 2010, when we let the property out, and went back to live in our own house.
Expenditure regarding the alterations from 2004-2010 have been stored, the receipts held in anticipation that this would be a capital expense when we came to eventually sell the property. We have recently sold the property, would we be able to claim these expenses to offset my capital gains bill.
Advice/thoughts would be most appreciated.
Many thanks

[DrBunsenHoneydew]

Hi everyone,

We had a detached house let out as 2 flats since 1992.
In 2004 the tenant of one flat moved out, we decided to do major alterations, changing the layout regarding kitchen/bathroom/ lounge, moving the boiler radiators etc.
In 2005 my tenant in the other flat moved out, we decided that flat also had to be modified, same procedure as the other flat.
Due to the time it was taking for the on going work, we decided to move into the property. Therefore letting out our main home in 2005. In 2008 we started to extend both flats, furnished, completion of the works in 2010, when we let the property out, and went back to live in our own house.
Expenditure regarding the alterations from 2004-2010 have been stored, the receipts held in anticipation that this would be a capital expense when we came to eventually sell the property. We have recently sold the property, would we be able to claim these expenses to offset my capital gains bill.
Advice/thoughts would be most appreciated.
Many thanks

TCGA 1992, s 38(1)(b) allows ‘enhancement expenditure’ to be deductible. This section requires that the expenditure must be incurred both ‘for the purpose of enhancing the value of the asset’ and be ‘reflected in the state or nature of the asset at the time of the disposal’. Save for any incurred just before disposal, routine repair and maintenance or refurbishment expenditure will not satisfy this test.

[peabottle]

Thank you DrBunsenHoneydew

I have just googled your reply TCGA 1992, s 38(1)(b) I have some reading up to do, I will report back in due course.
Regards

[peabottle]

Hello all,
I have been trying to get my head around this TCGA 1992, s38 ( 1 ) ( b ) regarding the receipt expenses. The pre letting plus selling expenditure is noted. I need more clarity regards the years 2005 – 2010 in between lettings, when we moved into the property. Regarding the major alterations/extensions, will all receipts be classified as capital expenditure (enhancement expenditure) in that period, claimable off my capital gains bill. ( Bear in mind we were letting our own house out in this period, both properties being treated individually/separately ).
Advice/thoughts would be most appreciated.

[pochisoldi]

Hello all,
I have been trying to get my head around this TCGA 1992, s38 ( 1 ) ( b ) regarding the receipt expenses. The pre letting plus selling expenditure is noted. I need more clarity regards the years 2005 – 2010 in between lettings, when we moved into the property. Regarding the major alterations/extensions, will all receipts be classified as capital expenditure (enhancement expenditure) in that period, claimable off my capital gains bill. ( Bear in mind we were letting our own house out in this period, both properties being treated individually/separately ).
Advice/thoughts would be most appreciated.

It is irrelevant whether the capital expense was incurred whilst you were living in the property or while you were renting it out.
Just add together the all capital expenditure for improving the property.

[helfordpirate]

Are you confident that the work you have undertaken on the house is a valid enhancement expenditure i.e. capital in nature?

You started with a house of a certain size split into two flats - you ended with a house of the same size split into two flats that is now renovated/repaired.

Can you say that the work was a capital enhancement to the whole house? Modifying the layout of the flats does not give you a bigger house (compare with building an extension which clearly is a capital enhancement). Updating a boiler is repair & maintenance of the central heating system - unless previously there was no CH. Putting in a new kitchen and bathroom is probably not capital in nature unless there was none before - or perhaps the improvement was so substantial as to make it capital i,e. a tiny room with a gas stove becoming a full-feature chefs kitchen.)

One of the tests I believe, is that the enhancement was intended to increase the value of the asset itself (in this case the whole house). If the work was simply to renovate the flats so that they could be better let then that would not seem a capital enhancement to the house.

Unfortunately, there is no clear definition of all these things - so it is down to HMRC interpretation and case law in the courts.

If the sums are substantial, it might be worth paying for some advice. Or just claim it and be prepared to argue your case.

[Lootman]

Are you confident that the work you have undertaken on the house is a valid enhancement expenditure i.e. capital in nature?

You started with a house of a certain size split into two flats - you ended with a house of the same size split into two flats that is now renovated/repaired.

Can you say that the work was a capital enhancement to the whole house? Modifying the layout of the flats does not give you a bigger house (compare with building an extension which clearly is a capital enhancement). Updating a boiler is repair & maintenance of the central heating system - unless previously there was no CH. Putting in a new kitchen and bathroom is probably not capital in nature unless there was none before - or perhaps the improvement was so substantial as to make it capital i,e. a tiny room with a gas stove becoming a full-feature chefs kitchen.)

One of the tests I believe, is that the enhancement was intended to increase the value of the asset itself (in this case the whole house). If the work was simply to renovate the flats so that they could be better let then that would not seem a capital enhancement to the house.

At least in respect of rental properties I always took this view: Everything you spend on a rental property can be used to offset taxes in some way. The basic distinction is between "operations and maintenance" and "capital expense".

O&E gets offset against the rent, whereas capital expenses adds to your cost basis for CGT purposes. Whenever I spent money I'd decide which of those two it was, and I never had those decisions questioned.

To use your example, replacing a kitchen or bathroom with a much better one is capital expenditure. It increases the value of the property and the amount of rent you can charge. The fact that there was a kitchen or bathroom there before does not change that. So an expense can be capital even if it does not increase the envelope of the structure. Increasing the quality also works.

I'd agree there is a grey area between the two. And I was always a little biased towards O&E because the tax break then is instant rather than eventual. So if anything I understated the capital expense.

[peabottle]

Hello,
Thank you, all your replies are consistent to what I have established, the area is grey, nothing black/white. I took it as I was not declaring any of the enhancement receipts for letting purposes due to the fact we were living there at the time, that this would be capital expenditure. Regards the alterations/extensions, I presume I have a good case, kitchens/bathrooms made bigger with more area. Where it goes grey so to speak, is when having to move the position of the boiler from a bedroom to a landing area cupboard. Taking advice from the gas engineer to renew the boiler at this point, also painting/decorating/new carpets, in the altered/ new rooms etc.
It does seem to be open to positive/negative interpretations.
As suggested I will have to give it my best shot to explain the situation.
I do thank you all for your time and effort in compiling your views.
Many thanks

[helfordpirate]

To use your example, replacing a kitchen or bathroom with a much better one is capital expenditure. It increases the value of the property and the amount of rent you can charge. The fact that there was a kitchen or bathroom there before does not change that. So an expense can be capital even if it does not increase the envelope of the structure. Increasing the quality also works.

See PIM202: "Problems can arise where the customer does work on an old asset. A repair or replacement of a part of a building using modern materials may give an apparent element of improvement because of the greater durability, superior qualities and so forth of the new material. But the cost normally remains revenue expenditure where any improvement arises only because the customer uses new materials that are broadly equivalent to the old materials."

As I said if you make a major improvement to a kitchen e.g. more units, freezer and dishwasher where there wasn't one, that is capital in nature. If you replace an existing kitchen with new modern units of better quality that is a revenue expense from the point of view of a hypothetical property business and so is not an enhancement expenditure. Similarly replacing a storage heaters with Gas CH is a capital expense; but replacing the boiler with a new one of essentially the same capacity and renewing old pipes is a revenue expense and so is not an enhancement expense.

It all depends on the facts and the OP didn't provide them.

... I see this has crossed with the OP ... but still relevant