Allowable deductions for capital gains
If you're selling an asset it's important to understand what items are allowable deductions for capital gains.
Certain items are considered allowable deductions for capital gains where they are incurred wholly and exclusively in the following circumstances:
We'll now consider these categories in more detail below.
Cost of acquisition
The legislation defines acquisition costs here. What's more, this is the amount paid in money or money's worth, by you or someone on your behalf, to acquire an asset. Plus it can be any costs incurred by you in creating an asset e.g. goodwill.
However, you'll need to consider special rules when determining the acquisition cost. Some examples of these are as follows:
Additionally, you may need to consider further rules if you acquired the asset before 31 March 1982.
Incidental acquisition costs
This is allowable expenditure where incurred as a result of the asset purchase. For example:
Enhancement expenditure
Generally speaking, this expenditure must be incurred to enhance the value of the asset. Therefore these costs are reflected in the state of the asset when it is disposed of. Additionally, it must have been incurred wholly and exclusively where you are establishing, preserving or defending title to or right over an asset.
However, this can be a common problem area when dealing with a buy to let property sale. This is because some expenses are considered repairs, rather than improvements. Therefore, they are allowable for income/corporation tax purposes rather than capital gains and vice versa.
Incidental costs of sale
This expenditure is allowable where it is incurred wholly and exclusively with the asset sale. For examples:
Expenditure allowed for income tax purposes
Typically the fees for arranging a mortgage or loan used to secure the purchase of an asset are not an allowable deduction for capital gains. Moreover, mortgage break fees are normally deductible against income tax. However, there are some exceptions, such as where they are classed as a premium.
Most break clauses on commercial loans only provide for compensating the lender where costs arise or interest is forgone upon early redemption and income tax relief is available in these circumstances.
Abortive costs
Abortive costs are rarely reflected in the state of an asset at the time of disposal. Therefore, they will rarely qualify as enhancement expenditure. What's more, the fact that costs are abortive does not change their nature.
If there are capital costs the only scope for relief is under the capital gains rules. However, if they are income costs they may be deductible as property or management expenses depending on the nature of the business.
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