CGT relief on renovated house
Discussion
If you were to live in a house, and renovate it during the time you live there - say 3 years - and then subsequently rent it for a period of 3 years, I understand you would be liable for CGT on 18 months of the increase in value over the 6 years. Say the property cost £200k to buy, you spent £40k updating it, and then it sold for £300k.
So the increase in value, less costs, is £60k over 6 years. You would be liable for 18 months of CGT, or £15k.
But my question is that because all the work was done when it was a private residence, how can you prove how much was spent renovating the property? Receipts wouldn't necessarily have been kept, and going back 6 years of bank statements, and picking out what was spent on the property would be almost impossible. As well there could have been cash payments which might not have bank statements or invoices still existing.
So the increase in value, less costs, is £60k over 6 years. You would be liable for 18 months of CGT, or £15k.
But my question is that because all the work was done when it was a private residence, how can you prove how much was spent renovating the property? Receipts wouldn't necessarily have been kept, and going back 6 years of bank statements, and picking out what was spent on the property would be almost impossible. As well there could have been cash payments which might not have bank statements or invoices still existing.
The 18 months is being reduced to 9 months.
The additional costs are referred to as "Enhancement Expenses" and will be added to the original purchase cost of the property. When the enhancement costs were incurred is irrelevant (as long as they were incurred by the owner during the period of ownership, of course).
The additional costs are referred to as "Enhancement Expenses" and will be added to the original purchase cost of the property. When the enhancement costs were incurred is irrelevant (as long as they were incurred by the owner during the period of ownership, of course).
Thanks Eric. Do you know when the time period is being reduced? (April 2020 I think?)
And while I agree that the Enhancement Expenses can be any time during the ownership, the question is how do you prove how much was spent? Or do you self-declare and its taken on trust?
And while I agree that the Enhancement Expenses can be any time during the ownership, the question is how do you prove how much was spent? Or do you self-declare and its taken on trust?
Edited by Condi on Thursday 15th November 12:13
You are supposed to have kept records of the enhancement costs (original invoices etc). If you have not, you will not be able to support the claim for those costs if HMRC asks for evidence.
This is the big problem with Self Assessment,. The bare submission does not require that evidence is submitted to HMRC. However, HMRC's assumption is that the supporting evidence exists and anyone who makes such a claim without being able to provide that evidence will, in effect, have committed a tax fraud.
This is the big problem with Self Assessment,. The bare submission does not require that evidence is submitted to HMRC. However, HMRC's assumption is that the supporting evidence exists and anyone who makes such a claim without being able to provide that evidence will, in effect, have committed a tax fraud.
Eric Mc said:
You are supposed to have kept records of the enhancement costs (original invoices etc). If you have not, you will not be able to support the claim for those costs if HMRC asks for evidence.
This is the big problem with Self Assessment,. The bare submission does not require that evidence is submitted to HMRC. However, HMRC's assumption is that the supporting evidence exists and anyone who makes such a claim without being able to provide that evidence will, in effect, have committed a tax fraud.
Hope that this isn't correct. Been in a similar situation lived in a house did about £20k improvements than let it out. No record of exact expenditure but believe HMRC documentation regarding this said that you could submit estimates. Just done this on last tax return but had already advised HMRC in previous years tax return that I would be doing this- no reply from HMRC to this letter. Alterations were substantial-e.g flat extension roof replaced with pitch roof with velux windows, new kitchen installed with appliances at opposite end, old rear door blocked up and window replaced by patio doors. Major landscaping-trees hedging removed and replaced by fencing, block paving and garage base. This is the big problem with Self Assessment,. The bare submission does not require that evidence is submitted to HMRC. However, HMRC's assumption is that the supporting evidence exists and anyone who makes such a claim without being able to provide that evidence will, in effect, have committed a tax fraud.
However did send evidence of alterations- a copy of estate agents brochure from when I purchased property together with link to sale after alterations.
Intention was just to sell property before 2022 and with various reliefs CGT would not be due.
However plans changed -bought sister out of her 50% of parents old home and refurbished this as a replacement rental. I have not lived in this(as an adult) and on sale would be subject to CGT but if loss allowed from previous house the bill will be reduced by about £4k Worth the effort of providing info to HMRC await there response with anticipation
Put another spin on it - if I decided to just say yeah I did £50k alterations (i.e. lie) to the property just to not have a tax bill - would that be fair to someone who had kept receipts for everything and had documentation, played by the rules set out by HMRC.
HMRC may not look - in which case lucky you.
You can use estimates - but HMRC response could well be prove your estimate was correct - now how could you prove your estimate, do you have documentation to support your estimate. If you do great, if you don't HMRC are within there powers to say that expense didn't exist.
Cash payments have no trace, what's to stop me making up I gave someone £20k cash to do a extension that only cost £10k, with no documentation - not got a receipt etc, HMRC can turn around and say - no expense as far as we are concerned.
HMRC may not look - in which case lucky you.
You can use estimates - but HMRC response could well be prove your estimate was correct - now how could you prove your estimate, do you have documentation to support your estimate. If you do great, if you don't HMRC are within there powers to say that expense didn't exist.
Cash payments have no trace, what's to stop me making up I gave someone £20k cash to do a extension that only cost £10k, with no documentation - not got a receipt etc, HMRC can turn around and say - no expense as far as we are concerned.
Condi said:
Thats kinda the point though. While under rental obviously all receipts are kept and expenses recorded, if you were doing your own property up over a period of many years, it is not conceivable that every trip to Screwfix or B+Q was recorded.
Tough. If you want to make a claim - you are supposed to have the back-up evidence for the claim. It's as simple as that.Because CGT on property sales is based on original purchase price and enhancement costs, it does mean that people need to hang on to the relevant paperwork for many years.
Eric Mc said:
Tough. If you want to make a claim - you are supposed to have the back-up evidence for the claim. It's as simple as that.
Because CGT on property sales is based on original purchase price and enhancement costs, it does mean that people need to hang on to the relevant paperwork for many years.
Had letter from HMRC this morning my claim for CGT costs based on estimates of costs (£23k)has been allowed in full. No queries about any of the items of expenditure A mentioned in my posts above I did provide supporting photographic evidence of the improvements made I have been completing self assessment tax returns for approx 20yrs and have never had a query about any of these. So not quite as "Simple as that" and pleased I made the effort to do it.Because CGT on property sales is based on original purchase price and enhancement costs, it does mean that people need to hang on to the relevant paperwork for many years.
Yep - they have full authority to ignore their own rules. In "the old days" I doubt very much that they would have allowed estimates of such magnitude. HMRC is broken and cannot apply its remit properly (luckilly for some).
I've had Inspectors of Taxes disallow estimated property repairs of £500 (in the days when there really were official Inspectors of Taxes - rather than just some algorithm scanning submissions).
I've had Inspectors of Taxes disallow estimated property repairs of £500 (in the days when there really were official Inspectors of Taxes - rather than just some algorithm scanning submissions).
twokcc said:
Had letter from HMRC this morning my claim for CGT costs based on estimates of costs (£23k)has been allowed in full. No queries about any of the items of expenditure A mentioned in my posts above I did provide supporting photographic evidence of the improvements made I have been completing self assessment tax returns for approx 20yrs and have never had a query about any of these. So not quite as "Simple as that" and pleased I made the effort to do it.
Thats partly the key - in that you did have some evidence. This does however fully depend on the inspector looking at the case, another inspector may have a different view.Our rental clients I always say take a picture before and after work done. Especially on something like new windows for example.
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