With it starting to feel more like spring, we are about
to embark on some work on our holiday cottage but are
concerned that any increase in value will be wiped out
by CGT.
You will not be alone in perhaps planning to convert
a loft or extend a kitchen. Of course, if it is your only
or main residence, the work will increase the value of
the property without any CGT problems, but it is a different
matter for a holiday home or investment property.
So we lose out on any investment when we come to sell
our second home?
Not necessarily. Where a property disposal is subject
to CGT, you can deduct the costs of improvements, provided
they are of a capital nature and are still apparent in
the state or nature of the asset when you sell or gift
it.
What does that mean? Do you still have to have receipts
attached to any work you have done?
No, nothing that glib. What it entails is that, if you
decide to dig a swimming pool in the grounds but then
fill it in again before you sell the property, you cannot
claim the cost of the work, as the pool no longer exists.
We also rent out our cottage from time to time. Does
that change things?
Yes. If you are selling a property you previously rented
out, you should go through your old builders' bills with
your accountant. Some expenses, such as redecoration,
may already have been claimed against income tax as repairs,
but other items that could not be claimed in previous
years on the annual tax return, such as the cost of a
new bathroom or kitchen, may be allowable against CGT
on sale.
What if we do the work ourselves? Can we "pay"
ourselves for tax purposes?
Sorry, no.You cannot claim the cost of your own labour
- you can, of course, claim the cost of materials.
Any other useful advice?
Don't forget that if you are taking out a loan to fund
building work on an investment property, you can claim
the interest against rental income and thus reduce your
income tax. It makes more sense to have mortgages and
loans on your investment property rather than your home,
as interest on the latter no longer attracts tax relief.
Maggie Fleming is a director of Isis Financial Planners
and a member of the Chartered Institute of Taxation.
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