CAPITAL GAINS TAX AND CAPITAL EXPENDITURE

Thank you Norah.

Wonderful news!

I am delighted to report that after looking at the invoices sent by both the builders we used to do a major refurbishment of the rental property the accountant has approved all of them as being allowable expenses to offset against our capital gains tax (CGT) liability. This has considerably reduced the CGT bill, so all's well that ends well.

M0nica

Its amazing how you can have a system that is simple and straight forward, let lose a bureacrat on it and they will immediately make it fiendishly complicated and guaranteed to trap the unwary.

It is fiendishly complicated, it is easy to get caught out, you do need to rely on your accountant to claim the allowances you are entitled to.

But you have to be in a postion to be able to know enough to think your accountant is not right before you can decide to get a second opinion.

If you don't believe your accountant is right get a second opinion.

Its amazing how you can have a system that is simple and straight forward, let lose a bureacrat on it and they will immediately make it fiendishly complicated and guaranteed to trap the unwary.

Interesting info Silverbrooks.

The 10% wear and tear allowance was designed to cover general depreciation of items in a furnished property. It would cover things like beds, televisions and kitchen appliances.

It was abolished from 6 April 2016. Instead there is replacement of domestic items relief. It has to be a like for like:

HMRC manuals:

www.gov.uk/hmrc-internal-manuals/property-income-manual/pim3010

www.gov.uk/hmrc-internal-manuals/property-income-manual/pim3210

www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46911

Example: Replacement of domestic items relief

In 2016/17, A replaces various items in the property which he lets out furnished. He replaces the sofa at a cost of £700, and the washing machine at a cost of £300. It costs him £10 to dispose of the old washing machine. He sells the old sofa on e-bay for £150.

In working out the profits of his property rental business for 2016/17, he is able to claim a deduction of £860 (the cost of the replacement items (£700 + £300), plus the cost of disposing of the fridge (£10), less the proceeds from the sale of the old sofa (£150)).

Example: Restricted relief

B lets out a property unfurnished. In 2016/17, she replaces the fridge with a fridge-freezer costing £600. Had she replaced the fridge with a similar fridge rather than a fridge-freezer, it would have cost her £400.

She is able to claim a deduction for part of the cost of replacing the fridge with a new fridge-freezer. However, this is capped at £400 – the cost of a like-for-like replacement.

In the second linked HMRC manual, it makes clear that fixtures are not domestic items and do not qualify for ‘Replacement of Domestic Items Relief’. Examples of fixtures are baths, washbasins, toilet, fitted furniture etc.

Now you need to read the third link about Specific deductions: repairs and renewals: what is a repair: the ‘entirety’ examples:

Example: Refitting a kitchen:

S owns a number of residential properties that she lets. The properties are not furnished lettings.

The boiler in one property needs replacing. As the new boiler has to be located in a different position, Sophia decides to modernise the kitchen as a whole.

All the existing base units, wall units and sink etc, are stripped out and replaced, as is the fitted cooker and hob. New units of an equivalent quality are installed but in a different layout to allow for the re-location of the boiler, finally the kitchen is re-plastered and re-tiled.

The entirety is the house, not the fitted kitchen. The new kitchen is slightly different but it does the same job as before. Sophia has simply replaced the old kitchen with a modern equivalent. This is a repair and allowable expenditure.

M0nica

cc

We make claims for the refurbishment and maintenance of our flat annually, including the management company's building service charges. Within the flat we claim for repairs and redecoration as well as replacing electrical appliances and updating and checking the electrical system. Surely most landlords claim annually for all these?

Yes, this is what I did. Every year a set of accounts, with an income and expenditure account and then the tax calculation including the 10% deduction for general maintenance.

That's how it's supposed to work. Apparently, I'm getting new taps because the landlord has decided he didn't spend enough on maintenance last tax year, so he's decided to start spending this tax year. My stairs and landing have just had new carpets. I'm not complaining!

crazyH

Where’s GSM ? Really miss her….

Well perhaps whoever it was who reported her until HQ barred her might think on.

cc

We make claims for the refurbishment and maintenance of our flat annually, including the management company's building service charges. Within the flat we claim for repairs and redecoration as well as replacing electrical appliances and updating and checking the electrical system. Surely most landlords claim annually for all these?

Yes, this is what I did. Every year a set of accounts, with an income and expenditure account and then the tax calculation including the 10% deduction for general maintenance.

win

crazyH

Where’s GSM ? Really miss her….

The first thing the new owners will do is rip out a kitchen and a bathroom and do it to their own taste. I have always been advised none of this adds value to a property. We added two extensions to our bungalow and that has added an enormous amount to the value to our property. So yes you have had the right advice.

Modern, clean, functional kitchens and bathrooms might not add to the value of a property for resale. However, they do make properties more attractive to tenants, who will be prepared to pay more. There will be natural wear and tear, thus depreciation, which is why they should be replaced periodically and count as expenses for tax purposes. Carpets are the same, although they should be replaced more frequently. Fittings don't need to be the best quality, but the tenants who are going to look after a property won't be attracted to worn out, shabby fittings.

You didn't ask for help. Your accountant had already given you the correct information.

Ramblingrose22

Dear Silverbrooks, thank you so much for your helpful and informative contribution.

It is a pity that others think it justified to use a request for help to make incorrect assumptions about people they don't even know and insult them into the bargain.

I will study what you have said carefully and try scaling up the amounts spent on each flat to see what our CGT bill might be. I think there are also worksheets you can use where you input the acquisition value, the sale value and the allowable costs.

I will have another look for those.

Thanks once again.

Why don't you get your accountant to do that?

I would be asking your accountant why she didn't advise you about the "capital" expenditure not being claimable later on. Also MOnica is correct, there is an annual 10% deduction you could have claimed for such "improvements" rather than claiming the full cost at the time. Maybe your accountant did claim it and you didn't realise. It is a very well-known deduction.

We make claims for the refurbishment and maintenance of our flat annually, including the management company's building service charges. Within the flat we claim for repairs and redecoration as well as replacing electrical appliances and updating and checking the electrical system. Surely most landlords claim annually for all these?

crazyH

Where’s GSM ? Really miss her….

The first thing the new owners will do is rip out a kitchen and a bathroom and do it to their own taste. I have always been advised none of this adds value to a property. We added two extensions to our bungalow and that has added an enormous amount to the value to our property. So yes you have had the right advice.

Dear Silverbrooks, thank you so much for your helpful and informative contribution.

It is a pity that others think it justified to use a request for help to make incorrect assumptions about people they don't even know and insult them into the bargain.

I will study what you have said carefully and try scaling up the amounts spent on each flat to see what our CGT bill might be. I think there are also worksheets you can use where you input the acquisition value, the sale value and the allowable costs.

I will have another look for those.

Thanks once again.

I don't intend to dignify M0nica's or growstuff's ignorant and unevidenced comments with any further replies.

Much the same argument as that used by the guys who cut down the Sycamore in Sycamore Gap, denying their own words and action.

growstuff

MOnica With regards to the property your DD has bought - it was the landlords's responsibility to check that the house wasn't in a shocking condition. Some of the costs of any damage would have been recouped from the damage deposit, but it sounds as though the landlord didn't use the money to rectify the situation.

I get a tad fed up with the stereotype of tenants as irresponsible house-wreckers.

The house was checked, but it is only when you pull the carpets up and end up with flea bites on your legs, that you realise there was an infestation of cat fleas. A blockage in the kitchen drain was hidden behind the foliage in the over grown garden. It was part functional so not immediately obvious. It is when DD start using the DW regularly and empty cleaning suds down the sink, and generally actually using water in the kitchen, that the problem became clear.

We too had walked round the house with DD and thought things looked reasonable, not brilliant, but reasonable. But then DD started cleaning behind radiators - and of course the fleas. The owners never went near it once the tenants were out. They were selling the property because they were financially overstretched and just wanted to get shot of the house and get hold of the money. Why should they care? the house wasn't theirs to worry about once it was sold.

I would never denigrate tenants. I rented out a property for 7-8 years and all my tenants bar 1 were fine.

and blame others for their failure when they end up in a mess like this at the end.

I agree that the criticism was harsh and unwarranted. I don’t think you are blaming anyone other than yourself and your co owners. You simply asked a question about what constitutes revenue expenditure and capital expenditure. You followed that up with the comment:

a lot of the refurbishment expenditure are not very detailed, so even if we had tried to claim …

I took that to mean (say) you had the property rewired (capex) but there may have been other small electrical items in there e.g. some new light fittings or energy efficient bulbs (revenue).

As a tax professional (retired), I was asked the same question many, many times. A lot of people make the same assumptions you did. And, some accountants will give you a different answer - which I why I always advise going back to the HMRC manuals. But how many lay people would know to do that?

But let’s look at the practical implications here.

The rate of CGT is going to be between 18% and 24% depending on your individual margin rates.

The rate of income tax in those years of outlay was 20% or 40%, as they are now.

Say £10,000 was spent on each flat, a total of £30,000. Say it was all revenue expenditure that wasn’t claimed against tax and is now out of time to do so.

If you all have a marginal income tax rate of 40%, the maximum you have lost in not claiming for revenue expenses would be £30,000 x 40% = £12,000.00 split three ways. At 20% is would be £6,000 split three ways.

Assuming no local factors have adversely affected property values, the capital gain over 12 years should be substantial. You inherited the property so will bring in the probate value as the “cost” price.

If all that £30,000 was claimable as capex and you all have a marginal CGT rate of 24%, it would save £7,200 in CGT split three ways.

So, each of you have lost at most £4,000, if the expenditure was £30,000. Obviously, you need to scale that up if you spent more.

Nobody wants to pay more tax than they have to (other than the Patriotic Millionaires) but I suspect measured against the gain you will realise, it’s a relatively small amount.

For the record you don’t have to receipt everything unless asked to do so, else HMRC would be swimming in bits of paper. HMRC aren’t going to quibble over £30 spent on say energy efficient lightbulbs or a lampshade but they would expect you to be able to prove major expenditure if asked, not only to show you paid those amounts but as evidence of potential evasion by others if you can’t.

If someone was under investigation and no paper evidence could be produced from 12 years ago, HMRC would ask to see some banking evidence of the payment. If someone were to claim £5,000 for rewiring and claimed they had no receipt and had no banking evidence of having paid the contractor, HMRC would disallow the claim and also ask for names and dates so they could have a wee look at the contractors accounting as well.

Fair enough Ramblingrose22, although I don't agree that my posts have been ignorant.

Well, I was seeking advice/help as so may of us do on Gransnet. Up to now I have always found others very helpful and constructive. It seems that some people on here simply like to kick people when they are down.

You do yourself no favours. And can you honestly say that you have never made a mistake? Pull the other one......!

I don't intend to dignify M0nica's or growstuff's ignorant and unevidenced comments with any further replies.

MOnica With regards to the property your DD has bought - it was the landlords's responsibility to check that the house wasn't in a shocking condition. Some of the costs of any damage would have been recouped from the damage deposit, but it sounds as though the landlord didn't use the money to rectify the situation.

I get a tad fed up with the stereotype of tenants as irresponsible house-wreckers.