Mark McLaughlin looks at the deduction of costs for capital gains tax purposes on the disposal of an investment property by an individual.
For capital gains tax (CGT) purposes, in determining a gain (or loss) when an individual disposes of an asset such as a buy-to-let investment property, certain incidental costs can normally be deducted in calculating the taxable gain (or allowable loss), in addition to the cost of acquiring the property.
Incidental costs generally fall into several categories: costs of acquiring the asset; enhancement expenditure; costs of establishing, preserving or defending title to (or rights over) the asset; and costs of disposal. However, not all costs are tax deductible; certain criteria must be satisfied. This article focuses on the final expenditure category – incidental costs of disposal.
Is it allowable?
To qualify as an allowable cost of disposal, the incidental expenditure must have been incurred ‘wholly and exclusively’ in making the disposal. Such costs may include fees, commission or remuneration paid for the professional services of a surveyor, valuer, auctioneer, accountant (but see below), agent, or legal adviser, and costs of transfer or conveyance (including stamp duty or stamp duty land tax).
Other potentially allowable disposal costs include costs of advertising for a buyer of the property, and ‘reasonable’ costs of valuation or apportionment in computing the gain, including ascertaining market value for tax purposes (e.g., where the property was gifted to a family member) (TCGA 1992, s 38(2)). However, interest payments are not deductible except for companies in certain circumstances (not considered here).
Professional fee or profit share?
The categories of allowable costs are prescriptive, and do not allow for much ‘wriggle room’. For example, in Bottomer & Anor v Revenue and Customs [2023] UKFTT 893 (TC). The first appellant (WB) knew another individual (SB), who was involved in the property sector. The appellants purchased a property for renovation and resale. WB agreed with SB that the appellants would pay SB half the eventual profit if SB helped with the project. Due to illness, WB had minimal involvement in the project for the first 9-12 months after the property purchase. The renovated property was sold in September 2017. Half of the agreed net profit was paid to SB and his wife. The appellants included the disposal on their tax returns for 2017/18, claiming a deduction in respect of the payments made to SB and his wife. HM Revenue and Customs (HMRC) subsequently disallowed the deductions.
On appeal, the First-tier Tribunal (FTT) considered (among other things) whether the payments qualified as incidental costs of disposal (or acquisition) as representing ‘fees, commission or remuneration paid for the professional services of an accountant or agent’. SB did not provide the services of an accountant. Furthermore, the FTT did not regard the payments made to SB (and his wife) as being for his ‘professional services’ as an agent, but rather as arising from a profit-sharing arrangement between the parties.
Practical tip
Accountant’s fees for computing a CGT liability are not allowable, except to the extent that they relate to the ascertainment of market value of the assets or to any apportionment for the purposes of the computation. This includes costs incurred for the purposes of preparing a tax return (or a post-transaction valuation check). However, the costs of resolving any disagreement on value with HMRC are not allowable (see HMRC’s Capital Gains Manual at CG15260).
