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bigduckontax, Accountant
Category: Tax
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I have developed the property I use for my Clinical Psychology

Customer Question

I have developed the property I use for my Clinical Psychology practise. It is a basement, and I have had it tanked and new doors and windows put on and decorated it. I have paid for this by lending my limited company the money. I raised the money myself by selling shares to raise the funds. I think from my reading that this is an allowable expense because it is a capital expenditure on developing a property. I want to know how to represent this in my accounts.
Submitted: 4 years ago.
Category: Tax
Expert:  bigduckontax replied 4 years ago.
Hello, I'm Keith and happy to help you with your question.

What you have done constitutes improvements to the property and cannot be set against the company's profits for Corporation Tax (CT) purposes. Running repairs, timely redecoration etc can. Improvements increase the purchase price of the property which will reduce any capital gain for Capital Gains Tax purposes in the event of some indeterminate, future disposal.

It would be appropriate to increase the fixed asset total by the improvement expenditure.

The interest paid by your company, if any, on the loan you made is allowable as an expense against the company's CT assessment. The same interest forms part of your income and is subject to Income Tax. Of course, if no interest is paid then the tax answer to that bit is the proverbial lemon!

I do hope I have thrown some light on your query.
Customer: replied 4 years ago.

Hi Keith, thanks for your reply - is it ok just to ask for further clarification?


Can you explain the following statement you made in more layman's terms for me?


"It would be appropriate to increase the fixed asset total by the improvement expenditure."




I am sure you know what you are talking about! But please can you help me understand what I have misunderstood then? : I read


BIM46904 - Specific deductions: repairs and renewals: what is a repair: improvements. from there I quote:


"If, instead of simply repairing the asset, the taxpayer has the asset altered, improved or upgraded, that is makes it better than it had been before, then all the cost of the work is capital expenditure. ...."


this leads me to believe that the total cost of the work is allowable - but I am not sure I know what it really means for it to be "allowable" can you explain?


it goes on to say " No revenue deduction can be allowed for any part of the expenditure." can you explain this sentence in layman's terms please?

So - is there any benefit in doing this at all?


Expert:  bigduckontax replied 4 years ago.
Right; you put in a new kitchen or install central heating say. This is capital expenditure. The relief is long term as the cost is added to the purchase price and when you come to sell will reduce the gain for tax purposes. In the accounts to reflect this the improvements would be added to the fixed asset costs to produce a higher figure in the balance sheet. In the Corporation Tax (CT) regime to which companies are subject a capital gain is merely entered as a profit in the company's books. My original advice which mentioned Capital Gains Tax was incorrect.

Say the central heating system breaks down. That is a repair item and the repair costs offsets rental in determining the level of profits liable to CT in the year. However, if you elected to replace the whole system that would be an enhancement, capital expenditure, see previous paragraph and only be relieved on ultimate sale.

The term allowable refers to some item of expenditure which is allowed against profits in a tax computation. In the States the term is tax deductable which may explain it a little better to you.

Does that help?
Customer: replied 4 years ago.

So I have my limited company - currently dormant. I have been operating as a sole trader instead for a few years. I want to know whether I need to do the above loan, capital expenditure, increased fixed asset is worth it? how will it benefit me?

Expert:  bigduckontax replied 4 years ago.
You increase your fixed assets by the costs of the improvements and on the opposite side of the balance sheet you have a debt which financed it. Ultimately the debt will be repaid from profits and the balance sheet will dhow a more healthy position. The only benefit to you is the use of enhanced facilities and a possible reduction in your tax bill.