Capital gains tax is based on the gain on the disposal of a chargeable asset, which itself is a reasonably simple calculation. One takes the cost of the asset from the proceeds, and voilà!
However, the cost that can be deducted is made up of four different components: the historical cost of the asset, any enhancement expenditure, and the incidental costs of acquisition and disposal. It is these final two components where taxpayers are often unsure of what can be included.
Incidental Costs of Acquisition
Incidental costs of acquisition are defined in the legislation as being only deductible to the extent that they are incurred wholly and exclusively for the purpose of the acquisition of the asset.
Examples would include the fees payable to a professional in acquiring the asset. For example, if the asset is a building, a solicitor is likely to be involved with the conveyancing, a mortgage adviser with the creation of any mortgage or a valuer or surveyor with the property structure report. There is often a commission payable by the purchaser at auction or to a purchasing agent if the buyer uses such an agent. Further professional fees may be required if an accountant or other such legal adviser is used.
The process of transferring ownership into the hands of the buyer will also sometimes have a cost. For example, for a property in (say) London, there is stamp duty land tax and for shares, stamp duty, which are both deductible. Other conveyancing charges (e.g., land registry fees) are also deductible, as are any marketing or advertising costs, such as the cost to advertise in the ‘wanted’ section of an online or paper publication.
Incidental Costs of Disposal
On the sale of the asset, there may also be incidental costs to consider. Again, the expenditure must be wholly and exclusively incurred for the purpose of the disposal. All the expenses listed above are likewise deductible when such costs are necessarily incurred in the disposal of an asset.
If the gain arises due to the termination of a trust where the beneficiary is absolutely entitled to the trust property, any expenses on the termination can also be offset as incidental costs of disposal.
In addition, costs reasonably incurred in making an initial valuation or apportionment of the asset being sold for capital gains purposes are also deductible. However, if the initial valuation or apportionment is challenged by HMRC, any costs of the challenge or further litigation are not covered as an incidental cost of disposal.
Example: Which Costs are Allowable?
Janet sold her second home in Brighton in November 2023. She had nominated her first home as her main residence with HMRC. She was a hoarder, and the house was untidy, so she paid a company to come in and ‘stage’ the house for sale. This cost £1,000 a month. She moved out and rented a house in the next street at £2,500 a month and put most of her furniture in storage, which cost £300 a month. Her heating cost £400 more a month in the rented house.
The house sold after two months and Janet deducted the cost of the staging, the rental of the separate house, the storage and the extra heating as incidental costs of disposal.
However, only the staging was an allowable deduction. This was incurred ‘wholly and exclusively’ for the sale. The other expenses had additional purposes, like putting a roof over Janet’s head, keeping her warm and keeping her furniture secure. They were too far removed from the sale to be wholly and exclusively associated with the disposal.
Practical Tip
Double-check that all incidental costs deducted are wholly and exclusively for the purpose of the sale or purchase of the asset and that there is no other reason they were incurred that could cause them to become unable to be offset.