Another reminder of the precise nature of the rules on enhancement expenditures.
Capital gains tax cases seem to come along like buses. Hot on the heels (or wheels?) of McEnroe & Newman (on which we commented in Tax Journal, 29 April 2022) comes another case about ‘enhancement’ expenditure: The Wakelyn Trust v HMRC [2022] UKFTT 23 (TC).
If it was hard not to be sympathetic to the taxpayers in McEnroe & Newman, it is, it must be said, hard to disagree with HMRC’s arguments which were accepted by the First-tier Tribunal (FTT) in Wakelyn.
The trust owned some land on the Cromarty Firth which had been leased to a company (B&R) whose business appears to have been making or repairing offshore drilling platforms. The crucial point is that B&R had constructed a graving dock and the terms of the lease required them to fill it in and reinstate the land on the termination of the lease (which ended in 2031, subject to tenant break clauses). The estimated cost of doing so was many millions of pounds.
By 2011, B&R had long since ceased to use the land. The FTT noted that the trust was ‘under pressure from the local community and politicians to “do a deal”’ to bring the land back into economic use: this would require replacing B&R with a tenant who would use the land and create employment locally.
B&R were content to surrender the lease with no consideration passing either way, but refused to make any payment in respect of the reinstatement costs. The trustees felt they had no alternative but to accept a surrender on those terms; the deal was done, and a new lease granted to a third party.
There’s no doubt that if the trust had paid B&R to surrender the lease and gain vacant possession the cost of doing so would have been treated by HMRC as allowable ‘enhancement expenditure’ to be taken into account in calculating any capital gain on the grant of the new lease.
The trust argued that as part of the deal with B&R, it had given up the right to require B&R to reinstate the land at the end of the lease. The evidence was that that would have cost B&R millions of pounds; that must approximate to the value of the right to reinstatement foregone by the trust. The trust had therefore given up a valuable right, and the value of that right must therefore rank as ‘enhancement cost’ in the same way as a payment would have done.
The FTT disagreed. The consideration passing for the surrender of the lease was ‘the mutual relinquishment by both parties of all their rights and obligations under the lease, it was surrendered for no expenditure’. The FTT rejected the submission that ‘the trust, having accepted the renunciation and agreed to the extinguishment of all the rights and obligations in the lease in exchange for B&R renouncing the lease, can then point to one of the many extinguished obligations and rights, the right to require reinstatement, as the consideration given by the trust for the surrender of the lease and therefore “expenditure” within the meaning of [TCGA 1992] s 38(1)(b).’
Since there was no expenditure, it was not necessary to consider the other requirements of the legislation, namely:
Was the expenditure incurred on the asset?
Was it incurred for the purpose of enhancing the value of the asset?
Was it reflected in the state or nature of the asset on disposal?
It is, however, difficult to argue with HMRC’s observation that ‘giving up the right could not have enhanced the value of the asset. The right was to require B&R to restore the land. Relinquishing that right must by definition have decreased the value of the asset’.
It was an inventive and imaginative attempt to obtain tax relief, but one that was never likely to find favour. But if nothing else it does serve to remind us (as did McEnroe & Newman) of the precision of the rules on enhancement expenditure.
Home >Articles > Wakelyn: more on CGT enhancement expenditure
Wakelyn: more on CGT enhancement expenditure
Another reminder of the precise nature of the rules on enhancement expenditures.
Capital gains tax cases seem to come along like buses. Hot on the heels (or wheels?) of McEnroe & Newman (on which we commented in Tax Journal, 29 April 2022) comes another case about ‘enhancement’ expenditure: The Wakelyn Trust v HMRC [2022] UKFTT 23 (TC).
If it was hard not to be sympathetic to the taxpayers in McEnroe & Newman, it is, it must be said, hard to disagree with HMRC’s arguments which were accepted by the First-tier Tribunal (FTT) in Wakelyn.
The trust owned some land on the Cromarty Firth which had been leased to a company (B&R) whose business appears to have been making or repairing offshore drilling platforms. The crucial point is that B&R had constructed a graving dock and the terms of the lease required them to fill it in and reinstate the land on the termination of the lease (which ended in 2031, subject to tenant break clauses). The estimated cost of doing so was many millions of pounds.
By 2011, B&R had long since ceased to use the land. The FTT noted that the trust was ‘under pressure from the local community and politicians to “do a deal”’ to bring the land back into economic use: this would require replacing B&R with a tenant who would use the land and create employment locally.
B&R were content to surrender the lease with no consideration passing either way, but refused to make any payment in respect of the reinstatement costs. The trustees felt they had no alternative but to accept a surrender on those terms; the deal was done, and a new lease granted to a third party.
There’s no doubt that if the trust had paid B&R to surrender the lease and gain vacant possession the cost of doing so would have been treated by HMRC as allowable ‘enhancement expenditure’ to be taken into account in calculating any capital gain on the grant of the new lease.
The trust argued that as part of the deal with B&R, it had given up the right to require B&R to reinstate the land at the end of the lease. The evidence was that that would have cost B&R millions of pounds; that must approximate to the value of the right to reinstatement foregone by the trust. The trust had therefore given up a valuable right, and the value of that right must therefore rank as ‘enhancement cost’ in the same way as a payment would have done.
The FTT disagreed. The consideration passing for the surrender of the lease was ‘the mutual relinquishment by both parties of all their rights and obligations under the lease, it was surrendered for no expenditure’. The FTT rejected the submission that ‘the trust, having accepted the renunciation and agreed to the extinguishment of all the rights and obligations in the lease in exchange for B&R renouncing the lease, can then point to one of the many extinguished obligations and rights, the right to require reinstatement, as the consideration given by the trust for the surrender of the lease and therefore “expenditure” within the meaning of [TCGA 1992] s 38(1)(b).’
Since there was no expenditure, it was not necessary to consider the other requirements of the legislation, namely:
Was the expenditure incurred on the asset?
Was it incurred for the purpose of enhancing the value of the asset?
Was it reflected in the state or nature of the asset on disposal?
It is, however, difficult to argue with HMRC’s observation that ‘giving up the right could not have enhanced the value of the asset. The right was to require B&R to restore the land. Relinquishing that right must by definition have decreased the value of the asset’.
It was an inventive and imaginative attempt to obtain tax relief, but one that was never likely to find favour. But if nothing else it does serve to remind us (as did McEnroe & Newman) of the precision of the rules on enhancement expenditure.
