CG15200 - Expenditure: enhancement expenditure: demolition costs
Expenditure in period before a newly-acquired property is let
Expenditure after the acquisition of the first interest
Expenditure on assets merged, divided etc
Demolition costs
You may accept that demolition costs are permanently reflected in the state of the land by the absence of the demolished building. In practice, the sole test of allowability is whether the purpose in incurring the expenditure was to enhance the value of the asset. For example, if a building is erected in a garden and is subsequently removed and the garden reinstated, neither the cost of the building nor of its removal will normally be allowable. But where the cost of demolition is small in relation to the cost of constructing a new erection, no adjustment need be made.
Expenditure in period before a newly-acquired property is let
If a property is acquired in a dilapidated condition, expenditure incurred in repairing it and putting it into a fit state for letting (including expenditure on decorations) may be inadmissible as a deduction for Profits of a Property Business, see PIM2020. For Capital Gains purposes, however, such expenditure as cannot be deducted in computing income may be regarded as allowable expenditure under TCGA92/S38 (1)(b).
Money’s worth
To the extent that money’s worth is given for the purpose of enhancing the value of an asset, the money’s worth so given constitutes expenditure incurred. See Chaney v Watkis, 58TC707.
However, the following do not qualify as enhancement expenditure:
- payments of rent and service charges in respect of a property held on lease - Emmerson v Computer Time International Ltd (in liquidation) 50TC628.
- the value of an individual owner’s own labour on alterations and improvements to an asset - Oram v Johnson, 53TC319.
It may be worthwhile to examine critically a claim that money’s worth has been given as enhancement expenditure if
- the recipient of the money’s worth is connected with the claimant, see CG14580+,or
- there are any other grounds for suspecting that the enhancement of the value of an asset may not have been the sole purpose for which the money’s worth was given.
Make such examination with a view to establishing
- whether the expenditure so incurred is expenditure wholly and exclusively on the asset for the purpose of the enhancement and
- that the giving of money’s worth was not influenced, for example, by family considerations.
Expenditure incurred after the acquisition of the first interest
Where capital expenditure has been incurred between the acquisition of the first interest in an asset and its final disposal, it may be necessary for apportionment purposes to determine whether the later expenditure comes within (a) or (b) of TCGA92/S38 (1).
For example, a subscription to a rights issue of shares, see CG50292, is within (a) but the cost of extending a building or a payment to a sitting tenant for vacating the property, see CG71262, is within (b).
Expenditure on assets merged, divided etc
TCGA92/S43
Assets may be merged or divided or may change their nature. Or rights or interests in or over assets may be created or extinguished. As a result of these changes, the value of an asset disposed of may derive from some other asset in the same ownership. In such circumstances, in determining the appropriate expenditure to be allowed as a deduction in computing the gain on the disposal, you should trace the allowable expenditure on any asset or assets from which the asset disposed of is `derived’ through the various changes. You should allow an appropriate proportion of the allowable expenditure which falls within paragraph (a) and (b) of TCGA92/S38 (1).
There is some guidance in case law on whether an asset derives from other assets.
- In Aberdeen Construction Group Ltd v CIR 52TC281, the release of a loan debt due by a company to a shareholder caused the shareholding to increase in value. But it was held that the conditions of what is now TCGA92/S43 were not satisfied, since the loan was not merged with the shares.
- In Bayley v Rogers 53TC420, it was held that what is now TCGA92/S43 did not apply where, following the expiry of a lease of business premises, the tenant was granted a new lease by order of a Court.
As regards the merger of short leaseholds into freeholds or long leases or short head leases, see CG71400+.