Revenue Note for Guidance

554 Exclusion of expenditure by reference to income tax

Summary

This section sets out the principle that allowable expenditure in computing chargeable gains is confined to expenditure incurred on capital account. This is achieved by excluding from allowable expenditure any expenditure which is allowable in computing income, profits, gains or losses for income tax purposes. By virtue of section 78(6), any expenditure which is taken into account for corporation tax purposes is similarly excluded.

Details

(1) The sums allowable under section 552 (acquisition, enhancement and disposal costs) do not include any items allowable as a deduction in computing income, or the profits, gains or losses of a trade or profession, for the purposes of income tax (or, by virtue of section 78(6), corporation tax), or any items which would be so allowable but for an insufficiency of income or profits.

(2) Provision is made to ensure that where a trade or profession is not involved allowable expenditure is nonetheless confined to capital outlay. This is done by excluding any expenditure which would be allowable as a deduction in computing income or profits if the asset had been used for the purposes of a trade or profession. Thus, outlay such as expenditure incurred in decorating a house is not allowable because, if the house were used for the purposes of a trade, the expenditure would be allowable in computing the profits of the trade.

Example

A person buys a cottage (not his main residence) and spends €10,000 in making good dilapidations. Later he has the cottage rewired for €2,000 and has it completely redecorated for €4,000. He also adds a garage at a cost of €12,000. When he comes to sell the property the following are not allowed in the computation of his chargeable gains —

Rewiring		€2,000
Redecoration		€4,000
Total not allowable		€6,000

This is because if the cottage were a fixed asset of a trade the expenditure would have been revenue expenditure and not capital expenditure.

The other expenditure would be of a capital nature and therefore allowable, namely —

Making good dilapidations	€10,000
New garage	€12,000
Total allowable	€22,000

These items are not in the course of the enjoyment of the property but as fixed expenditure incurred to obtain an asset or enhance the value of an asset.

Relevant Date: Finance Act 2021