Good evening all. I am hoping someone with more tax knowledge than me (which is most people, frankly!) can help me understand the CGT position on a property my wife has just sold.
She bought a two bedroom flat in Leicester in 2009 for one hundred and twelve thousand pounds and sold it last month for one hundred and eighty-five thousand. It was never our main residence. Over the years we spent a fair amount on improvements, including a new bathroom in 2015 (approximately four thousand five hundred pounds), a new boiler and full central heating system in 2017 (approximately six thousand pounds), and new windows throughout in 2020 (approximately three thousand eight hundred pounds). We have receipts for all of these.
My questions are as follows. First, can all of those improvement costs be deducted from the gain, or does HMRC distinguish between “improvements” and “maintenance”? The boiler replacement in particular worries me because one could argue a boiler is simply replacing a worn-out item rather than improving the property. Second, I have read that the annual CGT exemption has been reduced to three thousand pounds. Is that correct for this tax year? That seems extraordinarily low.
With thanks for any advice.
Graham, the key distinction HMRC draws is between enhancement expenditure and maintenance or repair. Enhancement expenditure that is still reflected in the state of the property at disposal can be deducted from the gain. A new extension, a loft conversion, adding a bathroom where there was none, these all qualify. Replacing a kitchen with a broadly equivalent kitchen does not, because that is maintenance even if the new one is nicer. That said, if you upgraded from a basic galley kitchen to a fully replumbed and rewired kitchen diner involving structural work, there is a reasonable argument that the structural element at least constitutes enhancement. HMRC’s capital gains manual at CG15180 sets this out and is worth reading before you file. The other trap is timing. If you spent money on improvements years ago but the property has since deteriorated to the point where those improvements are no longer reflected in the sale price, HMRC can argue the expenditure is not deductible. From recollection this is rarely enforced in practice but the rule is there. Do you have invoices and receipts for the work, and roughly when was it carried out?
Thank you @GrumpyLandlord47, that is extremely helpful and much clearer than anything I have managed to find online. The CG15180 reference is exactly what I needed.
To answer your question, yes, we do have invoices for most of the work. The main items were a loft conversion with a Velux window and en suite in 2016 (around twelve thousand pounds), a new boiler and full central heating upgrade in 2018 (around four thousand), and a full kitchen refit in 2019 which involved knocking through from the old galley into the dining room and replumbing the lot (around nine thousand). From your explanation, the loft conversion and possibly the kitchen structural work would qualify as enhancement, but the boiler replacement would be maintenance.
Is it really that simple to separate the kitchen into its structural and cosmetic elements? And would HMRC accept a reasonable apportionment, say 60% enhancement and 40% replacement, or do they expect a precise breakdown? My wife is not the most organised person in the world (tin hat on) but she did at least keep the main contractor invoices in a folder.
Graham, Grumpy has covered the rules well so I wont repeat them but I can tell you how this works in practice because I went through almost exactly the same exercise in 2019 when I sold a two bed flat I had owned since 2006. I had done a bathroom refit (about £3,200) and a kitchen knock through with new units and replumbing (about £7,500) and my accountant wanted to claim both as enhancement expenditure against the gain. HMRC did not query the kitchen knock through at all because the structural element was obvious from the invoices, the builder had itemised the RSL steel, the building regs sign off, and the replumbing separately from the cosmetic fit out so the split was already there in black and white. The bathroom was trickier because it was essentially a like for like replacement with better fixtures and they disallowed it which I accepted because frankly they were right.
The lesson from my experience is that if your contractor invoices are itemised (which a decent builder will have done for a £9k kitchen job) then you already have the breakdown HMRC wants. If the invoice just says “kitchen refit £9,000” with no detail then yes you would need to do a reasonable apportionment and in practice HMRC will accept something sensible as long as you can justify it. I would say 60/40 structural versus cosmetic on a knock through job is entirely defensible, possibly even conservative depending on the scope of the structural work.
The loft conversion is the easy one, that is enhancement all day long and nobody is going to argue with a Velux and en suite. Just make sure you have the building regs completion certificate as well as the invoices because HMRC occasionally asks for it. The boiler is maintenance as Grumpy says, not worth fighting over. Your total deductible improvements are probably in the region of £17k to £19k depending on how aggressive you want to be on the kitchen apportionment and that will make a meaningful dent in the gain.
Graham, one thing to be careful about with Steve’s comments is the bathroom example. A complete bathroom replacement is not automatically enhancement expenditure for CGT purposes. If you replaced a functional bathroom with a broadly equivalent one, HMRC will treat that as repair or maintenance, which means it is deductible against rental income if it was let but not deductible as a CGT cost. It only counts as enhancement if there is an identifiable element of improvement beyond the original standard, and even then only that incremental element qualifies. The classic test is whether the work goes beyond restoring the asset to its original condition. From recollection, you said the property had been let for part of the ownership period and occupied by your wife for the rest. That complicates things further because you need to apportion costs between the letting and occupation periods. If the bathroom was done during the letting period and claimed as a revenue expense at the time, you cannot then also claim it as a CGT deduction. Worth double checking with your accountant which costs were already offset against rental income before you finalise the computation.