What is defined as Capital Expenditure?

What is defined as Capital Expenditure?

8:23 AM, 20th April 2021, About 6 months ago 13

Text Size

I am looking to sell a rental property which I updated and improved some years ago.

I am wondering what items (if I do further refurbishment prior to sale) can be included as a capital expense against capital gains tax as opposed to maintenance, repairs and refurbishments on rental income.

Unfortunately, I cannot find an article giving a suggested “list” of what items may be included as a capital expense.

Many thanks

Jackie

 



Comments

by Jessie Jones

10:59 AM, 24th April 2021, About 6 months ago

Whether something is an improvement or a repair is open to a great deal of interpretation, but I don't know if HMRC have a different point of view.
People often 'flip' properties by doing simple kitchen and bathroom replacements and redecorating and increase the value by a lot more than they spend. That is because it is possible to improve the value of a property with fairly simple refurbishments.

"Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be"

If I replace a kitchen like for like, then it is clearly a repair. But if a property is in ruinous condition because of the behaviour of the tenants then once they move on I may well decide that this is the time to sell as I don't want to refurbish a house for new tenants to ruin it.
Theoretically, if I replace the broken, verminous kitchen with a new fitted one, with granite worktops, built in appliances and tiled walls and floors then it would appear to me that this is an improvement. The actual refurbishment I would make would be less than this, but still be a substantial improvement.
Extend this refurbishment to the entire property and it would be easy to spend, say £10k to £20k and increase the value by much more than this.

I can interpret this refurbishment as an improvement to the property to sell it, or as an allowable expense against the rental income I was receiving up to the point that my verminous tenants leave.

I would hope that I will this be able to claim tax relief as a capital loss or a loss against rental income, whichever suits my tax position at the time, just so long as I do pay tax.

This is a real life scenario that I am expecting to have to tackle at some point in the future, so I would be grateful for any feedback.

by Jessie Jones

11:09 AM, 24th April 2021, About 6 months ago

And just to add strength to my argument, from the above HMRC manual:

"CG15183 - Enhancement expenditure: reflected in state/nature of asset at disposal

Lord Emslie commented on this test in Aberdeen Construction Group Ltd v CIR, (52TC281) at page 290

` ….. what [Section 38(1)(b)] is looking for is, as the result of relevant expenditure, an identifiable change for the better in the state or nature of the asset, and this must be a change distinct from the enhancement of value’"

A substantial refurbishment would surely result in an "identifiable change for the better"

by Peter G

21:02 PM, 24th April 2021, About 6 months ago

Reply to the comment left by Jessie Jones at 24/04/2021 - 10:59
My understanding is that the HMRC is comparing the condition at purchase and sale, and does not consider what has happened to the property in the period between. So replacing a kitchen because the tenants have trashed it would be a repair and claimable on the annual accounts, whereas if you upgraded to a better quality product more expensive than the one in place when you bought the property, then that would be an upgrade so is a Capital expense and offset against CGT. Does this make sense?


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

BECOME A MEMBER