Deductibility of receiver’s and legal fees
In a recent case the First-tier Tribunal (FTT) has held that the fees of a receiver appointed to sell properties forming part of a letting business and legal fees in challenging the receivership and claiming against the bank for their actions in relation to the loan were not allowable expenditure under TCGA 1992, s. 38.
The FTT found that both a receiver’s fee and legal fees effectively paid by the taxpayers on the forced disposal of properties were not deductible for capital gains tax (CGT) purposes.
The taxpayers owned ten properties, nine of which were let out. It was decided to consolidate the various related loans in place into a single loan with one bank.
Two of the properties were sold, with the bank’s permission. The taxpayers intended to use the proceeds to reduce the loan. However, the bank did not do this. It claimed that the taxpayers were in breach of the terms of the loan as the reduced rental income dropped to less than a predetermined percentage of the interest.
A receiver was appointed who subsequently arranged sale of the remaining eight properties. The taxpayers incurred various legal fees to prevent the forced sale and subsequently to claim against the bank. The bank also deducted the receiver’s fees from the sale proceeds.
The FTT found that the receiver’s fee on the forced sale of the properties was not wholly and exclusively in relation to the sale as the receiver carried out other tasks. This was therefore not deductible. This follows the decision in the recent case of O’Donnell v HMRC  UKFTT 347 (TC).
The taxpayers argued that the legal fees fell within TCGA 1992 s.38(1)(b) and were incurred wholly and exclusively in establishing, preserving or defending title to, or a right over, the asset. The FTT disagreed; the work to prevent the forced sale and the litigation with the bank were concerned with their rights and liabilities under the loan agreement with the bank. The expenses were not allowable. The FTT suggested that the fees were all in fact of an income nature.
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