Tax Judge Throws Out Landlord’s CGT Loss Claim

The importance of keeping receipts and records of payments was underscored by a judge rejecting a property owner’s appeal against a capital gains tax bill.

HMO landlord James O’Donnell argued before the First-Tier Tax Tribunal that he had made a CGT loss and owed no tax.

However, HMRC disagreed and claimed he had overstated improvement and disposal costs.

The case is wide-ranging and looks at several common CGT issues.

O’Donnell was forced to sell four properties in 2008, including two he had lived in at different times when his lender Kleinwort Benson called in a loan secured against them.

O’Donnell’s uncle stepped in and bought the properties when the lender intended to sell them to clear a £950,000 liability. They were sold for £1.4 million.

Subsequently, O’Donnell discussed the sale with his accountant, who concluded he had made a CGT loss. The figures were not included in a tax return.

In September 2011, O’Donnell had a VAT inspection, and the transaction came to light. HMRC then raised a £31,928 CGT assessment.

After an appeal and reviews that upheld the assessment, O’Donnell appealed again to the tribunal.

Judge Charles Hellier found that many of the £450,000 improvement expenses claimed by O’Donnell could not be evidenced by invoices from a builder even though bank statements and other documents showed the amounts were paid.

His claim was reduced to £230,000.

O’Donnell also claimed £116,000 as disposal expenses refused because they were legal costs linked to the calling in of the loan and related to retaining the properties rather than their disposal.

The judge accepted that £56,591 was the correct claim.

He also viewed O’Donnell as careless in leaving the disposals off his tax return.

The tribunals also ordered O’Donnell to pay a penalty of 27.5% of the original tax.

HMRC will raise an assessment for the CGT and penalty.

The judge told O’Donnell that his claims for improvement costs would have been accepted if he had provided evidence to show how they were incurred.

He also rejected arguments about how the CGT was worked out.

“He says, is because the relief for the improvement expenditure should not in effect be abated by the effect of the period of his occupation as a main residence. He advances several arguments in favour of this approach and of its consistency with the principle of ordering reliefs to give the best results to the taxpayer,” said the Judge.

“This is a hopeless argument. The statute is clear. The gain is calculated first, and the fractional abatement is then applied to the gain. There is no room for changing the order of the elements of the calculation prescribed by the statute.”