The commonest claims relate to shares in companies which have failed, and HMRC actually publish lists of companies whose shares they accept have become of “negligible value”.
One type of asset that requires special treatment under these rules is land.
There is a general principle in English law that buildings are part of the land on which they stand – you cannot sell (or lease) the building without selling (or leasing) the land underneath it.
This means that if you own a building which is entirely destroyed (whether accidentally or deliberately), in terms of land law you have not made a “disposal” of that building because you have not “disposed” of the land on which it stood. You therefore cannot make a claim for a loss for CGT purposes. Or rather, you could not in the absence of legislation allowing special treatment in these circumstances.
At this point, section 24 of the Taxation of Chargeable Gains Act 1992 steps in and allows you, if you wish, to pretend that the building is a separate asset from the land.
This means that if you have demolished a building, you can treat this as a “disposal” of that building, so that the cost of the building (as distinct from the land) will produce a loss for CGT purposes, which you can deduct from any other capital gains you make in the same or any future tax year.
There are three important points to remember when deciding if you wish to make a claim for a loss in these circumstances:
You can only make a claim for relief under section 24 if the building concerned has been “entirely” destroyed, and HMRC take that word literally. If there is part of a wall still standing, then the building was not “entirely” destroyed and no claim can be made. If you are embarking on a project involving the demolition of a building, then you need to be able to show that it was “entirely” demolished.
Where part of the cost of the building has been the subject of a claim for capital allowances, that part of the cost cannot also be claimed for the purposes of the CGT loss under section 24. If the building was in use for your trade, you may have been able to claim industrial building allowances on the cost, or plant and machinery allowances on some of the components of the building. Those costs cannot also be treated as part of the cost of the building for section 24 purposes.
The Underlying Land
This is often the big problem. If you choose to calculate the deemed loss on the destruction of the building, you are also required to calculate the gain (or loss) that would have arisen if you had sold the land (with no building on it) at its current market value.
In many cases, particularly where the land has been owned for a number of years, this may produce a gain greater than the loss on the building and a section 24 claim will not be in your interests.
With land acquired in more recent times, however, it may well be the case that this will produce another loss to add to the loss on the building.
It may seem counter-intuitive that you can create a tax loss by knocking a building down, but given the right mix of costs and the right movement in market values since you acquired the land, this may well be a possibility. As with most tax planning ideas, the next step is to get the calculator out and do the sums!