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

Allowable deductions for capital gains tax

Certain items are considered allowable deductions for capital gains where they are incurred wholly and exclusively in the following circumstances: 

  • The acquisition and creation of the asset concerned
  • Where incurred as incidental costs of acquiring an asset
  • For enhancement of the asset
  • To establish, preserve or defend title to or rights over the asset
  • They are incurred as the  incidental costs of disposal of the asset

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: 

  • Where Assets are acquired as a result of a gift from your spouse or civil partner the acquisition cost is their original cost.
  • If you inherit an asset the market value of the asset at the date of death is considered to be the acquisition cost. 
  • When you acquire an asset as a gift from someone who isn't your spouse or civil partner the acquisition cost is market value at the date of gift unless a gift or holdover relief claim has been made. If that's the case the acquisition cost is reduced by the held over gain

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: 

  • Estate agents's commission  - where there is a property sale 
  • Legal costs 
  • Costs of transfer - e.g. stamp duty land tax 

Enhancement expenditure

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: 

  • Commission paid on the sale  - e.g. share brokerage costs
  • The cost of advertising to find a buyer
  • Professional fees e.g. the cost of a valuation

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

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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