What Enhancement costs allowable for 2nd property sale

by **bluebird1** on Sun Aug 29, 2010 5:59 pm

Hi,

I would be grateful if you could offer any guidance on my father-in-laws situation.

He purchased a block of 4 flats from the MOD some years ago, which were in a relative state of disrepair...

Having refurbished these - he has now sold one of the flats and we are completing his tax-return and are unsure as to what actually classifies as allowable 'enhancement costs'.

He has completely refurbished the flats - knocking down walls, replaced the old wooden windows with modern double glazing, replaced the boiler with an upgraded model etc....

Is there a definitive list anywhere?

many thanks

by **mullet** on Sun Aug 29, 2010 6:22 pm

There is no definitive list. To be allowable, enhancement expenditure must be capital in nature, incurred on the asset for enhancing the value of the asset, and still reflected in the state or nature of the asset at the time of disposal. Further, if the expenditure would have been allowable as a deduction against income tax had the asset been used in a trade, then the expenditure will not be allowable.

In broad terms, repairs and renovations would often be allowable as repairs. Double glazing has been allowable as a repair since Tax Bulletin 59 (I think) in mid 2002. So if the expenditure is allowable (or would have been allowable ... it doesn't have to be so deducted) against Sch A or Sch D income it is not allowable in a CG computation.

BUT - there is also the dilapidations rule. Read CG15201. If the asset was dilapidated (the practical definition here is unable to be used for its intended purpose) then expenditure in getting it back to a fit state will be disallowable against income and therefore allowable in a CG computation.

Bet you thought it was a simple matter .... ???

by **wardahelwa** on Tue Aug 31, 2010 5:09 pm

Hi, having just read this reply I am hoping someone can clarify this a bit more or give me an idea how I can get the right information. I am in a situation where I have (with my husband) bought a house which was very run down. We have had re-wiring done, replaced a lead plumbing system and installed central heating for the first time. Do these come under the delapidation rules and there-fore need to be kept for allowance against capital gains when we eventually sell or can I allow them against repairs for a letting property. Our first tenants move in today and the plan is to let the house for the forseeable future.
I have assumed (I hope correctly) that the kitchen, bathroom and decoration, while they certainly improve the value of the house are also liable to wear and tear and the value of these are not necessarily still the same at the time of sale so they count as repairs for tax purposes.
Any help on this would be very gratefully received.

by **mullet** on Wed Sep 01, 2010 6:51 am

It's difficult, as what is "dilapidated" to one person might be reasonable living conditions to another.

Without thinking too deeply I would claim the central heating as capital enhancement when you eventually sell, and the wiring/plumbing/repairs etc as repairs - i.e. against letting income.

by **wardahelwa** on Wed Sep 01, 2010 11:00 pm

Thanks
In this case of the electrics delapidated means totally unsafe and not working at all. On a previous property (also now rented) they were functional but still failed a safety check by a certified electrician and had to be re-wired for this reason.

It is really difficult to work these things out when there is no definative information available. I have considerd asking the tax office directly but I don't want to draw attention to myself in case I have made mistakes in the past and get clobbered for those. I have the best intentions and no wish to avoid paying tax I just need to know which sort I should be paying!

by **section 44** on Fri Sep 03, 2010 12:33 pm

Presumably he has let the flats?

by **Incredulum** on Fri Sep 03, 2010 5:36 pm

section 44 wrote:Presumably he has let the flats?

msp, I think the rewiring, replumbing etc. is capital

http://www.hmrc.gov.uk/manuals/bimmanual/bim35450.htm makes the point very strongly that

You should treat repairs expenditure following a change in the persons carrying on a trade, where the change is treated as a cessation/commencement, as revenue expenditure if the asset was in an adequate state of repair at the time of change. If abnormally heavy repairs expenditure is incurred on an asset shortly after the change of ownership the likelihood that it is capital is increased. But expenditure recurring at intervals of a few years (for example exterior painting of a building which has been deferred by the previous owner but which in the normal course of events falls to be expended shortly after the building is acquired) should be allowed.

As for OP, he may possibly be trading if he purchased the flats with a view to making a quick(ish) buck selling them on.

by **mullet** on Sat Sep 04, 2010 10:27 am

msp, I think the rewiring, replumbing etc. is capital

With the further and better information I agree with you.

Unfortunately, in this sort of situation, the preferred treatment is often influenced by the owner's personal circumstances. If they have Sch A profit they want it as repairs so they get the deduction "now". But if there is no hope of profit they want it as capital. It's sometimes an impossible situation when that sort of thinking is applied.

by **wardahelwa** on Mon Sep 06, 2010 8:28 am

Thanks MSP you hit the nail on the head there. Although the tax saving is less on capital gains (we are lower rate payers), the likely hood is that if we allow all the repairs against maintenance we will never get into profit. If, however, we sell the house within the next 10 years, we will make substatial capital gains against which we can offset the repairs. The value of the house went from £125K to about £170K so we could end up with a whacking great cpaital gains tax bill.

I think I need to get advice from the horses mouth (tax ofice) and then at least I will have the defence that I did my best to get it right. Also (I hope) if I will be using the option which gives me the lower tax saving, if it is corrected laterI should end up in pocket.

by **Incredulum** on Mon Sep 06, 2010 8:00 pm

It is not up to the tax office to give you advice. In the UK we have a system of tax called "self assessment" - i.e. it is up to you to get it right.

Moreover, a telephone call with the tax office will not give you a point of view that you can rely on. All too often, posters on here are given wrong advice by HMRC. I think your costs are mostly if not entirely capital.

Also (I hope) if I will be using the option which gives me the lower tax saving, if it is corrected laterI should end up in pocket.

No. If you sell the house in 10 years' time and in your CGT computation offset costs incurred a decade previously that turn out to be revenue then you will not be able to obtain income tax relief as you will be out of time.