When calculating your capital gains liability there are certain costs that are deductable under S38(1) of the Taxation of Chargeable Gains Act 1992. The following items can be deducted from your gain:-
- The original acquisition value;
- The value of enhancing the asset;
- The value of establishing, preserving or defending the title and right over the asset; and
- The incidental costs of the disposal
When you deduct all of the above from the sale price you are left with the gain which is then subject to capital gains tax.
Incidental costs of disposal include certain costs of the vendor i.e. legal fees etc; however the First Tribunal recently had to consider whether the legal costs of a purchaser can also be deducted if the vendor pays those costs.
In O’Donnell v HMRC  UKFTT 347 (TC) the vendor O’Donnell was appealing against amendments made to his self-assessment return made by HMRC. He argued that because he had paid his purchaser’s legal fees he should be able to deduct this from his capital gain because it was incidental to his sale. The Tribunal agreed, finding that his paying of the fees was part of the negotiations of the sale and therefore the sale would not have taken place if he had not paid the fees.
Tax payers should be aware that this could be available to them, however a deduction would only be successful if the only reason for the reimbursement of the purchaser is to ensure that the sale occurs, otherwise it is not an ‘incidental cost’ under S38(1)(c) of the Act. In short, it depends on whether it is fundamental to the sale and the outcome will be decided according to the facts relating to each transaction.