We purchased a house late last year and since then have been spending the lockdowns renovating the house ourselves. We have the knowledge, skill and qualifications to do most of the work ourselves, which means we save on the cost of a builder.
To date we have kept all receipts for materials bought for the renovations. We have also kept track of the hours that we are spending working on the house. Can our time and labour count towards enhancement expenditure?
If we were to hire a builder to do the same work, we would pay him a sum of €X for which we would have a receipt at the end of the project, which I assume could be submitted as enhancement expenditure. Because we are doing the building work ourselves, we don’t have that receipt to submit so we are unsure how we would present the cost and value of our time in enhancing the property to Revenue and reduce the sum that is eligible for capital gains tax should we decide to sell the property in the next year or so.
Ms MT, email
Renovating a property is as good a way of of passing our multiple Covid-19 lockdowns as any. And with all but essential construction forbidden right now, doing the job yourself is the only way you’re going to get anything done.
But that doesn’t mean you’ll get any credit for it from the tax authorities.
Enhancement expenditure can be a very important path to reducing eventual capital gains tax bills. And it makes sense. If you buy a property at price X and carry out considerable work to improve or enhance it before selling it at higher price Y, it would be unfair to charge tax on the simple difference or capital gain as they are not the same standard of property.
Exactly what can be allowed is defined by section 522 of the Taxes Consolidation Act 1997. It states in subsection 1(b) that “the amount of any expenditure wholly and exclusively incurred on the asset by the person or on the person’s behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by the person in establishing, preserving or defending the person’s title to, or to a right over, the asset” is allowable against capital gains.
Revenue explains this with a straightforward, if unlikely, example. If you build a tennis court on the property, enhancing its value, you can claim its cost. However, if, having built the tennis court, you change your mind, break it up and build a swimming pool on the plot, you can no longer charge for the cost of the tennis court as it is not part of the enhanced property when you go to sell it. You can charge for the pool.
For most people, enhancement is more prosaic – a new sunroom or a small extension – but the principle remains the same.
I have not been able to find anything definitive in relation to personal labour and enhancement expenditure, although I do know personal labour is not an allowable cost against rental income on property refurbishment.
Norah Collender, professional tax leader at the Chartered Accountants Ireland, says that the key issue is “expenditure … incurred”. This implies that only money actually spent on the enhancement project is chargeable against a capital gain, not money that would otherwise have been spent had you not carried out the works yourself.
In essence, your knowledge and skills may have meant you did not need to hire outside labour for the project, but that means you didn’t actually spend money on such labour. And there is nothing in the legislation that allows you to set a reasonable notional cost against your own labour.
Ms Collender also points to a 1980 court case of Oram v Johnson, which established that enhancement expenditure did not include the notional cost of the owner’s labour.
Although this was a UK case, much of Irish law is based on UK antecedent. And in the absence of a case challenged in the Irish courts, it is the best yardstick available.
The case related to a Herefordshire cottage that was transformed from a “derelict, uninhabited two-bedroom cottage with no modern amenities to a desirable four-bedroom cottage with all modern amenities”.
Apart from receipted expenses, Mr Johnson claimed for 2,200 hours of work carried out mostly by himself with some casual labour from family and friends, which he valued at £1 an hour (this was in 1968-1975).
The court ultimately ruled against him.
So, you are unlikely to get any credit for the labour you’ve put into this project even though you would have been able to deduct it had you employed an outside builder to do the job. All you are likely to be allowed in this case is the receipted expenses related to the enhancement expenditure.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into