Q&A: CGT on property sale and costs paid by others

Croner VIP Tax Team. Croner.

In this week’s Q&A, RL, tax adviser at Croner VIP Tax Team, explains whether capital gains tax (CGT) relief is available at sale when a family member lives rent free and pays for an extension.

Q. My client owns a property which was previously let out. A few years ago his son moved in and now occupies the property as their main residence. The son does not pay any rent but does pay for upkeep costs, including adding an extension to the property last year at a cost of £50,000.

The client is looking to sell the property shortly when the son moves to a new home, can they have any relief for the cost of the extension?

A. The legislation relating to allowable costs for property disposals can be found at section 38 Taxation on Chargeable Gains Act 1992 (TCGA 1992) which contains an exhaustive list of expenses which can be set against proceeds on a later disposal for capital gains tax (CGT) purposes.

An extension would normally fall within s38(1)(b), being ‘expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal’.

The phrase in bold highlighted above is however a potential issue as the expenditure has not been incurred by the taxpayer, it has been incurred by their son.

Therefore, the next question would be, has the expenditure been incurred on behalf of the taxpayer?

This was considered in the Upper Tribunal case of Lowe/Civic Environmental Systems Ltd v HMRC [2022] BTC 510, which found that the taxpayer could only have relief under s38 for expenses paid by another party if that other party had been acting as their agent.

Where a quote or an invoice was addressed to Mr Lowe, but paid by another party, he could claim the cost under s38 against his gain. Where neither a quote nor an invoice was addressed to him, he could not deduct the expense.

It is therefore essential to check the paperwork relating to the extension to see whether any of it is addressed to the father, as that will be the only way there will be any chance of entitlement to a deduction under s38.