In The Wakelyn Trust v HMRC [2022] TC8375, the First Tier Tribunal (FTT) denied a deduction for enhancement expenditure for the value of releasing a lessee from a lease. No expenditure had been incurred.

Section 38(1)(b) 1992 requires that for a deduction to be claimed for enhancement expenditure when an asset is disposed of, the expenditure must have been incurred and be reflected in the state or nature of the asset at the time of disposal.

The Wakelyn Trust owned land in Scotland which had been leased on a 30-year lease to a company, B&R, for the construction of a dock and fabrication yard.

The lease provided that:

  • At least five years before the lease expired, the lessee must if requested, remove all buildings and structures from the land and fill in any excavations (the reinstatement clause).
  • After a 30-year extension involving changes to the terms, the lease was surrendered by the lessee who had agreed to sell the yard and structures thereon to another company.
  • As part of the surrender, the Trust received a £1m payment from the company acquiring the yard from the lessee in return for the grant of a new lease.
  • In calculating the Capital Gains Tax (CGT) due on the £1m the trust sought to claim a deduction of £956,000 for a value attributed to the cost of releasing B&R from the reinstatement clause, on the basis that it was allowable expenditure under s.38 TCGA 1992.
  • HMRC disagreed, on the grounds that no expenditure had been incurred. They issued a Closure notice (under direction from the tribunal) disallowing the £956,000 and changing a capital loss into a capital gain. HMRC’s figures also included a recalculation using the part disposal formula and a reduced valuation figure at March 1982. The trust Appealed the closure notice.

The FTT in dismissing the appeal found that:

  • If the trust had paid a sum to procure the surrender of the lease and if was reflected in the state or nature of the property at the date of disposal then that amount would be deductible under s.38.
  • The lease surrender was a mutual agreement between lessor and lessee. No new obligation was assumed by the trust or payment made. The only consideration which passed was mutual as both parties relinquished their rights and obligations under the lease. Such relinquishment was not expenditure within s.38 nor was it money’s worth.
  • The amount attributed by the trust to the value of the reinstatement right that it had foregone was purely notional expenditure and disallowable.

Useful guides on this topic

CGT: Deductible expenditure
What expenditure is allowable for Capital Gains Tax (CGT)? What about loan interest, early redemption fees etc?

How to calculate a capital gain or loss
How do you calculate a capital gain or loss? What costs are deductible? How can losses be utilised against capital gains?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

External link

The Wakelyn Trust v HMRC [2022] TC8375   

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