Deducting legal costs from CGT on sale of 2nd property

[cjm1963]

Good Morning - My first post and I'd greatly appreciate some help with this!

We've just exchanged contracts on a flat sale (a buy to let property) and I'm starting to think about CGT on the proceeds. My question relates to a previous, failed attempt to sell the flat in 2022. At that time, we were obliged to pay £4,000 for a Deed of Variation to the lease. Is that a cost which can be deducted from the proceeds of the flat sale to reduce our CGT liability? (I'd argue that it was a necessary legal cost, although it's not directly connected to the sale that's now going through.) Thank you!

[bd6759]

Only very specific costs relating to the sale can be deducted.

Abortive expenditure is not allowed.

[someone]

Only very specific costs relating to the sale can be deducted.

Abortive expenditure is not allowed.

This doesn't sound like abortive costs though, it sounds like the lease was varied, presumably to satisfy the (abortive) buyers or their mortgagee.

It probably depends on exactly what the variation was as to whether it's capital but I would think that most variations are capital expenses even if just to correct a drafting error.

I'd guess it was a lease extension but this:
https://www.gov.uk/government/publications/extension-of-leases/practice-guide-28-extension-of-leases
suggests to me that even if extended via a deed of variation, it's still a CGT event (probably not covered under esc D39 as the OP doesn't mention a premium paid)

2.2 Use of deeds of variation

A deed of variation extending the term will always be deemed to be effecting a surrender of the existing lease (by operation of law) followed by the immediate grant of a new lease.


To the OP, it's very possible that you have two CGT events, a disposal in 2022 (which will get you the 12K allowance - but probably some penalties also for late reporting) and a further disposal in 2025 which is likely a small or even zero/negative gain.

[cjm1963]

Thank you for your replies.

The deed of variation was actually to protect future tenants with a mortgage, not to vary the length of the lease.

Can I just check with "someone" - why would we be penalised for late reporting linked to the abortive sale in 2022, given that there was no sale so no capital gain?

Thanks so much for your help, it's greatly appreciated.

[someone]

If you extend a lease then it's a disposal of the old lease and simultaneous acquisition of a new longer lease. The disposal of the old lease triggers CGT (if due) at the point the lease is extended.

There's a special concession that means that in the right circumstances HMRC will allow you to behave as though no disposal occurred.

So if you had extended the lease then there would have been a CGT event in 2022 which you would have been late reporting. My assumption was that the lenders wouldn't give a mortgage because the lease was shorter than 70 years (or whatever they now require as the minimum).

Did you actually do the variation to the lease? And is it something that potentially benefits any buyer or just the buyer who pulled out?

If you did do it, and it has a potential benefit to any buyer then I'd say it's capital in nature as it increases the value of your lease, and so is an allowed expense for CGT.

But if you didn't do it, or it was only of benefit to that one buyer, then it's not an allowable cost of sale.

(Note that it's possible that whatever you did is also a disposal and an acquisition - I have no idea - and you'd have to ask an expert in leasehold law to confirm either way - probably easiest to just ignore the thing as it's probably not and HMRC will never query it anyway so why waste money on lawyers... )

[someone]

https://www.boodlehatfield.com/articles/pitfalls-of-lease-variations/

This seems to have a good account of when varying a lease is a disposal.