No CGT deduction for referral & project management fees

In Wayne & Beverley Bottomer v HMRC [2023] TC8968, the First Tier Tribunal (FTT) held that fees paid to an individual who provided a lead to a property and then helped manage its renovation were not deductible against the capital gain realised when the property was sold. The payments did not meet the requirements of s.38 TCGA 1992.

Under s.38 TCGA 1992, costs are allowable as deductions from the consideration received when computing the gain or loss on the disposal of the asset so long as they are incurred wholly and exclusively relating to:

• The acquisition or creation of the asset.
• The incidental costs of the acquisition.
• The enhancement of the asset.
• Establishing, preserving or defending title to or rights over the asset.
• The incidental costs of disposal.
• With exclusion for expenses that are Allowable for Income Tax. 

Mr and Mrs Bottomer acquired a property which they renovated and sold at a gain.

• The opportunity to buy the property had come via a distant relative (SB) of Mr Bottomer (WB) who was unable to make the purchase himself. SB offered to pass on the property details for a fee of £10,000-15,000 though no figure was ever agreed upon.
• Due to ill-health WB was unable to fully manage the property renovation himself so SB agreed to undertake this in return for a 50% profit share when the property was sold. As with the initial referral fee, this was a verbal agreement only.
• SB and his wife were paid £31,906.50 between them, being half of the total profit realised on the sale of the property. Mr and Mrs Bottomer claimed £16,000 each as a deductible cost under s.38 TCGA when they declared the overall gain on their Self Assessment returns.
• HMRC raised assessments denying the deductions on the basis that the payment was not wholly and exclusively for the acquisition of the property, nor were they incidental costs of acquisition or disposal. Mr and Mrs Bottomer Appealed.

The FTT dismissed the appeal:

• The amounts paid were not expenditures on the property and were not represented in the state or nature of the property when it was disposed of.
• S.38 (2) TCGA provides that, to be incidental costs here, the payments must be:
  • Expenditure incurred wholly and exclusively for the purposes of either the acquisition or the disposal.
  • Fees, commission, or remuneration for the professional services of a surveyor, valuer, auctioneer, accountant, agent or legal adviser.
• As the payments had not been agreed when the property was purchased and as the disposal would have taken place with or without the payments being made, the judge could not see how they could be wholly and exclusively for the purposes of either the acquisition or the disposal.
• Whilst the payments could be categorised as fees commission or remuneration, since SB could not have provided professional services as he did not operate in any of the professions listed at s.38(2) and had also not acted as an agent, the payments did not fall to be incidental costs within the definition at s.38 TCGA and were not deductible for CGT purposes.

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?

CGT: How to calculate a capital gain or loss
How do you calculate a capital gain or loss? What costs are deductible? Can you set losses against capital gains?

How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

Wayne & Beverley Bottomer v HMRC [2023] TC8968