Capital gains tax – evidence of cost of improvements

Facts of the case. In the case of Tobias Ridpath v HMRC , Mr Ridpath (R) failed to declare that he had disposed of two rental properties in 2004/5. In 2010, when it came to light that the disposals had taken place, his accountant submitted CGT computations showing gains calculated by deducting the original purchase and selling costs from the sale proceeds. HMRC originally intended to deal with the tax position by reaching a settlement with R, but he failed to make an offer in settlement because the accountant’s computations did not take into account the cost of improvements. As R didn’t provide any details, HMRC issued assessments. R then appealed on the basis that he had spent £40,000 on improvements. However, at the tribunal he couldn’t provide any records other than bank statements and then wasn’t able to recall how the amounts were spent, even when asked about specific withdrawals.

The decision. Unsurprisingly, the tribunal dismissed R’s appeal as he was unable to provide any details of the improvement expenses.

Tip 1. As this case shows, it’s vitally important to keep evidence of improvements made to rental properties. The costs can be deducted from the sale proceeds as long as the enhancements are still there when the property is sold, i.e. they are permanent improvements. For example, clients can claim the cost of adding a conservatory, loft extension or improving the kitchen. So, it’s important to remind your clients to always keep the receipts for any improvement work they’ve had done.

Tip 2. If you couldn’t offset the costs against your client’s rental income, then you will usually be able to offset them against their capital gain when they sell the property. When you prepare their annual rental accounts, keep a list of all disallowed expenditure. This list can then be reviewed when they sell so that no items of capital expenditure are missed.