The decision of the First-tier Tribunal (‘FTT’) in Wayne and Beverley Bottomer v HMRC [2023] UKFTT 893 (TC) reminds us of the very restricted nature of the deductions which are allowable in computing a gain for the purposes of Capital Gains Tax (‘CGT’).
Stuart Bottomer (a distant relation of Wayne) introduced a property investment opportunity to Wayne in return for an introducer’s fee. Nothing firm was agreed but figures in the range £10,000 to £15,000 were discussed.
Wayne (jointly with Beverley) subsequently bought the property, intending to renovate it. But finding that, because of ill health, he was unable to manage the project himself as he had planned, he agreed with Stuart that Stuart would help as necessary in return for half the profit on the transaction.
About three years after the purchase, the renovated property was sold at a gain of some £60,000, and Stuart was paid his half.
In computing the amount of the taxable gain, Wayne and Beverley deducted the amount paid to Stuart.
HMRC demurred.
To be deductible, the amount paid would need to fall within one of the categories specified by the law. The only possible candidates were:
- Expenditure wholly and exclusively incurred on the asset to enhance its value and which is reflected in the state or nature of the asset on disposal
- Incidental costs incurred wholly and exclusively for the purposes of the acquisition or disposal. These in turn are limited to fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser.
An introducer’s fee simply did not, in HMRC’s view, fit within either of those categories, and the FTT agreed.
The FTT did not consider that the amount paid could fairly be said ‘to represent expenditure “on” the property’, nor that the amount paid was ‘“represented [the wording of the legislation is “reflected” but no matter] in the state or nature” of the property at the time of its disposal.’
Some would call that decision harsh. It was not in dispute that work had been done on renovating the property: and the evidence was that part of Stuart’s fee was attributable to his oversight of that work (remember, following the additional involvement, the fee paid was at least double the bare ‘introducer’s fee’ originally discussed). One would have thought that when a building is renovated, the costs of a site manager are just as much ‘spent on the asset’ and reflected in its changed state or nature as are the costs of the workers who physically carry out the work. Wayne may reasonably feel hard done by, we think, by that part of the decision.
The FTT saw two insuperable difficulties with treating any part of the expenditure as an incidental cost of the acquisition or disposal:
- It wasn’t incurred ‘wholly and exclusively’ for the purposes of the acquisition or disposal: it wasn’t agreed at the time of the acquisition, and the disposal would have taken place independently of any obligation to make the payment in question.
- Stuart wasn’t acting in the transaction as ‘surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser’. Although he happened to be an accountant in practice, he wasn’t being paid for professional services.
One final point of interest. Since Wayne was in the building trade (he was a carpenter/joiner) and the property had apparently been bought to renovate and sell at a profit, it is slightly surprising that HMRC accepted that CGT was appropriate at all. This looks at first blush more like a ‘venture in the nature of trade’. Ironically, had the transaction been so treated, the payment to Stuart would have been deductible in computing the profit subject to Income Tax and it is quite possible that the tax bill would have been lower. Perhaps that’s why HMRC were content to acquiesce in CGT treatment.
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