Enhancement expenditure

The deductibility of enhancement expenditure for chargeable gains purposes is subject to the requirements of s. 38(1)(b) TCGA 1992. These require that the expenditure enhances the value of the asset and is reflected in the state or nature of the asset at the time of the disposal.

In FD Fenston Will Trusts v HMRC SpC 589, the taxpayer was the shareholder in a company to which it made capital contributions (gifts, not typically seen in the UK but common in some overseas jurisdictions).

It was accepted that the contributions enhanced the value of the shares, but the Commissioners held that state or nature of the assets in question, i.e., the shares, was unchanged by the expenditure. A deduction for the capital contributions was, therefore, not due under s.38(1)(b).

This is the first reported case for a good while on the deductibility of enhancement expenditure and serves as a reminder of the notoriously restrictive nature of s.38, especially when the expenditure relates to intangible assets.