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Where Taxpayers and Advisers Meet
Property Tax Deductions: Don’t Miss Out!
22/09/2020, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - Property Taxation
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Mark McLaughlin warns that transactions should be structured correctly to avoid the risk of adverse tax consequences.

Introduction

Capital gains tax (CGT) relief is generally available on the disposal of property in respect of improvements etc., for ‘the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the assets, being expenditure reflected in the state or nature of the asset at the time of the disposal’ (TCGA 1992 s 38(1)(b)).

Note the requirement that expenditure is incurred on the asset ‘by him or on his behalf’ (‘him’ being the person to whom the gain accrues on the disposal of the property). Does this mean that (for example) enhancement expenditure incurred by an individual property owner’s company could be treated as incurred by the property owner for the purposes of claiming relief for enhancement expenditure?

This point was recently considered in Sidebottom v Revenue and Customs [2018] UKFTT 549 (TC).

Costs Incurred by the Company

In Sidebottom, the taxpayers (husband and wife at the time) owned a disused factory and connected land (SM) acquired for £170,000 in 2002. The taxpayers intended redeveloping SM, or at least obtaining planning permission and selling it at a profit. They subsequently established a new company (MPL) with equal shareholdings. They entered into a development agreement (the taxpayers were MPL’s sole customer), whereby MPL would develop SM. Expenditure in relation to SM was incurred by MPL, using loans obtained by one of the taxpayers (RDS). He advanced lump sums to MPL, and the company used those funds to pay the cost of contractors etc. in respect of SM. The advances made by RDS were treated as director’s loans in MPL’s accounts, none of which were ever repaid by MPL.

Problems following a change of the taxpayers’ bankers in 2008 resulted in MPL being struck off in February 2010. In March 2011, the bank appointed receivers and sold SM for approximately £400,000. HM Revenue and Customs assessed the taxpayers on the basis that the expenditure in respect of obtaining planning permission and improvement work was not incurred by the taxpayers and so did not qualify as enhancement expenditure for CGT purposes.

The taxpayers had claimed enhancement expenditure of £283,227, being an amount equal to the director’s loan account (DLA). They argued that in economic terms they had incurred the expenditure and should therefore obtain tax relief for it. However, the First-tier Tribunal disagreed, and dismissed their appeal.

A Different Outcome?

The difficulty for the taxpayers in Sidebottom was that MPL never charged them for work on the property (it had been agreed that the company’s development fee would be payable once planning permission was obtained, but no invoice was raised). Accordingly, the taxpayers did not incur the cost of MPL’s services under the development agreement.

However, a loss occurred in the above case on the DLA, which became an irrecoverable loan upon the winding up of MPL. Tax relief for ‘loans to traders’ is potentially available in such circumstances, if certain conditions are satisfied (see TCGA 1992 s 253).

The above article was first published in Property Tax Insider (www.taxinsider.co.uk).

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

Mark  is a consultant with The TACS Partnership LLP (www.tacs.co.uk). He is also editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional) 

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’. This content is available as part of a number of Bloomsbury Professional's online modules.

He is Editor and co-author of ‘HMRC Investigations Handbook‘ (Bloomsbury Professional).

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’, which provides free information and resources on UK taxes to taxpayers and professionals, and TaxationWeb’s sister site TaxBookShop.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.

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