Allowable deductions for capital gains
If you are thinking of selling an asset it's important to understand what items are allowable deductions for capital gains when arriving at the taxable amount
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 here what are considered acquisition costs. Roughly translated this is the amount paid in money or money's worth, by you or someone else on your behalf to acquire an asset. Alternatively it is any costs incurred by you in creating an asset e.g. goodwill.
However, you may 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 costs of acquisition
This expenditure is allowed where it is incurred as a result of the asset purchase. Examples of such costs are as follows:
As a general rule, this expenditure must be incurred purely to enhance the value of the asset and reflected in the state and nature 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.
This can be a common problem area when dealing with a buy to let property sale. Some expenditure may be considered repairs, rather than of an improvement nature and thus allowable for income/corporation tax purposes rather than capital gains and vice versa.
Incidental costs of sale
This expenditure is allowed where it is incurred wholly and exclusively as a result of the asset purchase. Examples of such costs are as follows:
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. Mortgage break fees are normally deductible against income tax, with 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 are rarely reflected in the state or nature of an asset at the time of disposal. So they will rarely qualify as enhancement expenditure. The fact that costs are abortive does not change their nature.
If they are capital the only scope for relief is under the capital gains rules, if they are income they may be deductible as property or management expenses depending on the nature of the business.
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