y taxpayers fall into misunderstanding.

To qualify as enhancement expenditure, the cost must:

• Be incurred wholly and exclusively for the purpose of enhancing the value of the asset

• Be reflected in the state or nature of the asset at the time of disposal

Put simply, if you make improvements to the asset that still exist when you sell it, you may claim those costs. But if the improvement is removed or altered before disposal, the cost becomes irrelevant for CGT purposes.

Example: HMRC’s View

HMRC provides this illustration:

• You build a tennis court on your land for £5,000.

• Later, you demolish it and build a swimming pool for £20,000.

• Only the swimming pool cost qualifies as enhancement expenditure. The tennis court is not reflected in the state of the land when sold and therefore not allowable.

Another example given by HMRC highlights payments made to facilitate a transaction that are not spent on the asset itself. For example:

• A parent company pays compensation to officers of a subsidiary to resign, as requested by a buyer.

• Although this is related to a sale of shares in the subsidiary, the payment is not expenditure on the asset (the shares) and therefore not deductible.

These examples show how tight the interpretation of “on the asset” is.

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3. Incidental Costs of Acquisition and Disposal

These are narrowly defined and include only:

• Professional fees: Surveyors, valuers, auctioneers, accountants, agents, legal advisers

• Conveyancing and transfer costs: Including stamp duty, SDLT, or equivalents in devolved administrations

• Advertising costs: For finding a buyer or seller

• Valuation or apportionment: If necessary for calculating the gain

Again, these costs must be wholly and exclusively incurred for the acquisition or disposal of the asset. Any costs that don’t fall within these defined categories are not allowable.

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Common Pitfalls and Non-Allowable Costs

Certain costs, even if connected to the transaction or the asset, do not qualify under section 38. Examples include:

• Maintenance or repair costs before sale

• Costs associated with unsuccessful transactions

• Legal fees not directly tied to acquiring or selling the asset

• Costs incurred but not reflected in the final asset, such as fixtures later removed

These are often described by HMRC as “tax nothings”—they are simply disregarded in CGT calculations.

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Practical Tips

1. Keep detailed records
   Ensure all invoices, contracts, and breakdowns of costs are retained and clearly linked to the acquisition or enhancement of the asset.

2. Document the purpose
   Where possible, show how the expenditure enhanced the asset and that the improvement is still present at the time of sale.

3. Be cautious with indirect costs
   Payments made to third parties to facilitate a sale (e.g., staff redundancy or buyer requirements) may seem relevant but will likely be disallowed.

4. Seek advice for complex disposals
   Where property or share disposals involve related parties, trusts, or CGT reliefs (e.g., Principal Private Residence Relief or Business Asset Disposal Relief), a detailed review is essential.

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Summary: What Section 38 Allows and Disallows

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Conclusion

Section 38 of TCGA 1992 sets strict criteria on what can be deducted for CGT purposes. Just because an expense is associated with the asset does not make it deductible. To qualify, the cost must be incurred wholly and exclusively on the asset, enhance its value, and be reflected in its state at the time of disposal.

If you’re unsure whether your expenditure qualifies under section 38, Merranti Accounting can help. Our tax advisers will review your transactions, clarify what’s deductible, and help you optimise your CGT position.

Contact Merranti Accounting today for expert support on capital gains tax and allowable expenditure.