Capital Gains Tax deduction not allowed for introductory and project management fees
In the case of Wayne & Beverley Bottomer v HMRC , the First Tier Tribunal (FTT) held that introductory fees and amounts paid for overseeing a renovation project were not deductible against the capital gain realised when the property was sold.
In this article we look at what costs are usually allowable when calculating a gain or loss on the disposal of an asset and what we can learn from this recent case.
What costs are usually allowable when computing a gain or loss on disposal of an asset?
Costs are usually allowable as a deduction for capital gains tax purposes on the disposal of the asset, so long as they are incurred wholly and exclusively in relation to:
- The acquisition or creation of the asset.
- The incidental costs of the acquisition.
- The enhancement of the asset.
- Establishing, preserving or defending title to or rights over the asset.
- The incidental costs of disposal.
- With exclusion for expenses that are allowable for Income Tax purposes.
What were the facts in Wayne & Beverley Bottomer v HMRC?
- Wayne Bottomer (‘WB’) was given details of an investment opportunity by Stuart Bottomer (‘SB’), a distant relative, who was unable to make the purchase himself. SB offered to pass on the property details in return for a fee.
- WB purchased the property jointly with his wife but due to health issues, was unable to manage the renovation himself. It was agreed that WB and his wife would pay SB half of the profit on disposal if SB managed the renovation on their behalf.
- On disposal of the property, both WB and his wife claimed a deduction for their share of the amount paid to SB.
- HMRC raised assessments and denied the deductions on the basis that the payments were not wholly and exclusively for the acquisition of the property, nor were they incidental costs of acquisition or disposal.
- WB and his wife appealed.
What did the FTT find?
The FTT dismissed the appeals, and the costs were not deductible for the following reasons:
- They were not enhancement expenditure because they were not incurred ‘on the asset’, nor were they reflected in its state or nature at the time of disposal.
- The payments had not been agreed at the time of the acquisition and the disposal would have taken place whether or not the payments were made. As such, it was difficult to argue that they were wholly and exclusively for the purposes of either the acquisition or disposal.
- The payments to SB arose from a profit-sharing arrangement that had been agreed between the parties on a shared project.
- SB did not provide any professional services on this transaction and had not acted as an agent. As such, the payments could not be classified as incidental costs of acquisition or disposal, in the form of fees, commission or remuneration paid for professional services.
Our thoughts & advice
HMRC has made it clear with this decision that introductory fees and amounts paid for overseeing a renovation project are not deductible expenses for capital gains tax purposes.
This decision provides confirmation that the legislation is very restrictive and designed to ensure that not all expenditure incurred should be deductible for capital gains tax purposes.
If you have made any chargeable disposals, we recommend that professional advice is taken from the outset.
For any advice on Capital Gains Tax get in touch at firstname.lastname@example.org
The information was correct at time of publishing but may now be out of date.