Capital gains tax on renovated dilapidated second home

[CatcheeMonkee]

In 2013 we bought a repossessed house, handily close to a daughter's house, at a low price because of the state that it was in - broken windows, unusable bathroom, kitchen damaged by previous tenants.

It was sold in June 2019 so time to sort out the capital gains tax - we made a £50,000 profit between the eventual sale price and the purchase price.

I have calculated the costs of buying and selling - solicitors, estate agents, surveyors etc. and they can offset the upcoming CGT bill.

But what about the brand new bathroom, new windows, making safe of the heating and electrics etc? On the face of it, these may not count, but as I say the price we paid took into account the necessary "improvements". The house was unlivable in until these jobs were completed.

Should I add the cost of these to the expenses thus hoping to reduce the CGT or is it a non-starter??

Thank you.

[genou]

https://www.gov.uk/hmrc-internal-manual ... al/pim2030

is your starting point. Normally people are looking to have expenditure classed as revenue to offset rents, and you are the other way round. But quoting from the HMRC manual - "Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure."

So you should have a decent shout at cutting your CGT bill, but you need to work through the detail, not on each line item, but on each class of expense so that you have a reasonable case if queried. You will be self-assessing, so assess away, but keep it plausible so that if HMRC do look at your return and the upshot is more tax to pay,, that increase is a technical adjustment ( more tax ) rather than an investigation ( tax and penalties ). It will always help if you can quote their own manual back at them.

[fisher]

Have you kept receipts?

It sounds like the vast majority of what you've done would be eligible to be offset against CGT as a capital expense. Look at the links previously given. There will be HMRC guides as well for CGT. Mostly it is common sense. In your case, renovating a dilapidated house, I would be surprised if the great majority of your expenses incurred aren't eligible as capital expenses.

[PinkDalek]

In 2013 we bought a repossessed house ... It was sold in June 2019 ...
But what about the brand new bathroom, new windows, making safe of the heating and electrics etc? ...

Was this house purchased for your own use (presumably never a Main Residence) or, if not, was it rented out and, if so, have you claimed any of the relevant expenses against property income?

In addition to the HMRC Manual, there is an HMRC Capital Gains Tax for Land and Buildings Toolkit linked below. It is primarily for Tax agents and advisers but may provide some helpful guidance and links back to the HMRC Manual here and there:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/886362/CGT-for-Land-Buildings-Toolkit-2020-Revised.pdf

Much of it can probably be ignored but the Allowable costs section commences on page 16.

[Eboli]

One thing that is often forgotten in these types of cases is the doctrine of the entirety. The distinction between capital and income expenditure in UK tax law is extremely complicated because it is often tempting to categorise individual expenditures according to some pre-formed list of what is normally one side of the line rather than the other. (And, indeed, this can become legally legitimate where the use of such lists are prescribed, for example in capital allowances).

As one wag Judge had it, whereas every repair is an improvements there can be cases where the repairs are so substantial that the whole is transformed and therefore are to the entirety. I'm not saying that the entirety doctrine applies here as there is not a full enough description of the works to make any judgment.

You might find the following HMRC instruction manual extract worth a read:

https://www.gov.uk/hmrc-internal-manual ... l/bim46910

Eb.

[Lootman]

One thing that is often forgotten in these types of cases is the doctrine of the entirety. The distinction between capital and income expenditure in UK tax law is extremely complicated because it is often tempting to categorise individual expenditures according to some pre-formed list of what is normally one side of the line rather than the other. (And, indeed, this can become legally legitimate where the use of such lists are prescribed, for example in capital allowances).

As one wag Judge had it, whereas every repair is an improvements there can be cases where the repairs are so substantial that the whole is transformed and therefore are to the entirety. I'm not saying that the entirety doctrine applies here as there is not a full enough description of the works to make any judgment.

It may theoretically be a complicated topic but, in the 32 years that I was involved in property, I took a common sense view that was always accepted. If it was a repair or otherwise an item of maintenance or operation, then the cost was offset against rental income for tax purposes. If it was a material improvement that added value then it went on the cost basis and reduced the eventual capital gains tax.

It seemed to me that the most important thing was that I was consistent about this, that I kept good records, and that I could explain why I made every decision that I could. Avoid being opportunistically inconsistent.