Buy to let – Lease premium

Client had a leasehold residential buy to let property. He paid a hefty premium to extend its lease term by another 70 years.

The question was whether we should treat this expense as revenue or capital.

If we took it as revenue expenses, this could be immediately deducted from the rental income and save tax immediately.

If we took it as capital expense, we will need to wait till the property is sold before we can use these expenses as a deductible expense.

Common sense guides us that any expense done to enhance the value of the property is a capital expense but in tax world many times common sense and tax laws are divergent thus we need to clarify it with a credible source.

HMRC manuals were not easily revealing the answer thus an open search on google took us to a webportal which confirmed our understanding i.e. it’s a capital expense and pointed out the HMRC manual part.

Please read the link below:
https://www.property-tax-portal.co.uk/taxquestion93.shtml

HMRC Manual reference CG71401; link
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71401

 I will suggest also read CG71400: Introduction – which give a bit of background; link
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71400

UK resident – selling a overseas property

A friend asked me how capital gain on a overseas property is calculated. I thought I will give an example enumerated by HMRC in its guidance.

In 1983, Ms A who is both resident and domiciled in the United Kingdom buys a property overseas for foreign currency, which she acquired for £50,000 on the date of purchase of the property (that is, there was no gain or loss on the acquisition and disposal of the currency). In 1986-87 she sells the property for 3,000,000 units of the foreign currency at a time when the exchange rate is 40 to £1. The sterling equivalent of the currency so obtained is therefore £75,000.

The chargeable gain (subject to expenses) is £75,000 less £50,000 equals £25,000

Reference: HMRC Manuals – CG78408