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OCL Accountancy: Investment properties – capital gains tax relief for capital expenditure

Gains made on the sale of second homes (e.g. buy-to-let properties or holiday lets) are subject to Capital Gains Tax.

The gain is calculated by deducting the original cost of the property from the sale proceeds as well as capital expenditure incurred on the property during ownership. Capital expenditure would include the cost of building or acquiring the property, enhancing the value of the property and the incidental cost of acquiring or disposing of it.

Incidental costs include:

  • fees for the professional services of surveyors, valuers, auctioneers, accountants, agents and legal advisers
  • the costs of transfer or conveyance
  • stamp duty land tax
  • the costs of advertising to find a buyer
  • any costs reasonably incurred in making a valuation or apportionment for the purposes of the CGT computation.

Fees paid to professional advisors are only allowable for CGT purposes where they relate directly to the acquisition or disposal. Accountancy fees relating to the disclosure of the property disposal to HMRC, are not directly related to the disposal itself and therefore not allowable. While the property is owned, money spent on enhancing the property could be an allowable deduction for CGT purposes. This could be an extension, loft conversion, full renovation or upgrade of a bathroom or kitchen for example.

The expenditure must be incurred for the purpose of enhancing the asset and must also be reflected in the state of the asset at the time of its disposal. The cost of an extension would only be allowable if the extension is still there when the property is sold.

A distinction must be drawn between improvement expenditure and repairs. A repair maintains the current state of a property whereas enhancement improves the property. Repair costs are not deductible for CGT purposes.

In all cases it is important to keep a record of all work done to the property (with invoices) along with the purchase and sale completion statements so that you do not miss out on any possible CGT relief!

Where CGT is payable, a CGT return now needs to be completed and submitted to HMRC within 60 days of completion.

For tax saving tips contact the OCL team: call Marie Sheldrake, Matt Bryant or Samantha Taylor on 01225 445507 | oclaccountancy.com

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