In Robert David Sidebottom and Jane Elizabeth Pickett v HMRC [2018] TC06724 the First Tier Tribunal (FTT) found that enhancement expenditure by a company on property owned by it’s shareholders was not deductible for capital gains tax; an irrecoverable directors loan to the company was not a reimbursement of the expenditure.
Under s38 TCGA 1992, on the disposal of an asset an individual may deduct:
“the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset”.
Mr Sidebottom and his then wife (Ms Pickett) purchased an old mill property for redevelopment.
- Money was spent on surveys, planning permission and remedial works by a company owned by Mr Sidebottom and Ms Pickett having been persuaded that the planning application would be more favourably considered ifade by a company.
- The company was funded by directors loans from Mr Sidebottom.
- An agreement was entered into with the company that it would receive a 5% profit share on sale of the property plus reimbursement of all monies spent on the property.
- Following delays, funding issues and the global financial crisis the property had to be sold quickly and the company was wound up. The profit share was never paid nor the costs reimbursed and Mr Sidebottom’s directors loan was irrecoverable.
- The property disposal was not declared by the taxpayers and following HMRC enquiry they were assessed to CGT on the disposal.
- The taxpayers appealed claiming relief for the enhancement expenditure: it had been incurred by them because they had funded the company (and thereby funded the expenditure) and these funds were never repaid by the company.
The tribunal dismissed the appeal.
- The expenditure had not been incurred by the appellant, whilst Mr Sidebottom had a loss it was on his directors loan, and this needed to be separately claimed, it could not just be conflated with enhancement expenditure.
- The economic loss on the loan was for Mr Sidebottom as director and not the appellants as joint landowners.
As the tribunal judge alluded to, had the dissolution of the company been given more thought it might have been possible for relief to be obtained for this expenditure by ensuring that a reimbursement of the costs took place. It is also possible, subject to the conditions being met, that Mr Sidebottom might have been able to claim CGT relief under the Loans to traders rules and used this to offset his share of the gain. All in all this was a badly thought out set of transactions highlighting the need to take appropriate advice before transactions are entered into.
Links to our guides:
Close company loans toolkit (loans to participators)
External link:
Robert David Sidebottom and Jane Elizabeth Pickett v HMRC [2018] TC06724
