Capital Gains Tax on sale of restaurant

Lincoln

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I was in the restaurant business for a number of years from 1999 to 2006 (soletrader). I built a small restaurant / coffee shop on my own land in 1999. I ceased trading in 2006 and de-registered with Revenue for VAT etc.
I put the restaurant on the market in 2008 and am now in discussions with an interested party.
I understand from revenue.ie that I may have to pay Capital Gains tax on the sale of the restaurant. I propose to take professional advice on the matter but would like to get some understanding of whats involved in advance.

The following are the details:
Build the restaurant in 1999 at a cost of €120,000. I got a capital grant of €40,000 towards the building cost. I extended the building in 2003 at a cost of €70,000. I also installed a new kitchen at a further cost of €40,000 and bought new furnishings etc at a cost of €20,000.

My questions please:
Will the sale of the restaurant be subject to Capital Gains Tax?
If so, is the cost for the gain based on the original costs+ enhancements at the dates on which they were incurred or is the gain based on Net Book values at cessation date?
Can the cost of the new kitchen and new furnishings be included in the calculation of the gain?

The following is my attempt at a CGT calculation:

Sale price (estimate) 280,000

Less Disposal Costs (est) 2,000

Net Proceeds 278,000

Cost


Building Cost in 1999 120,000

Less Capital Grant -40,000
Net Cost 80,000 index 1.193 95,440

Extension in 2003 70,000

Kitchen Equipment 40,000

Furnishings 20,000

Total allowable cost 225,440

Chargeable Gain 52,560

I would really appreciate any advice / comments on the above
 
I was in the restaurant business for a number of years from 1999 to 2006 (soletrader). I built a small restaurant / coffee shop on my own land in 1999. I ceased trading in 2006 and de-registered with Revenue for VAT etc.
I put the restaurant on the market in 2008 and am now in discussions with an interested party.
I understand from revenue.ie that I may have to pay Capital Gains tax on the sale of the restaurant. I propose to take professional advice on the matter but would like to get some understanding of whats involved in advance.

The following are the details:
Build the restaurant in 1999 at a cost of €120,000. I got a capital grant of €40,000 towards the building cost. I extended the building in 2003 at a cost of €70,000. I also installed a new kitchen at a further cost of €40,000 and bought new furnishings etc at a cost of €20,000.

My questions please:
Will the sale of the restaurant be subject to Capital Gains Tax?
If so, is the cost for the gain based on the original costs+ enhancements at the dates on which they were incurred or is the gain based on Net Book values at cessation date?
Can the cost of the new kitchen and new furnishings be included in the calculation of the gain?

The following is my attempt at a CGT calculation:

Sale price (estimate) 280,000

Less Disposal Costs (est) 2,000

Net Proceeds 278,000

Cost


Building Cost in 1999 120,000

Less Capital Grant -40,000
Net Cost 80,000 index 1.193 95,440

Extension in 2003 70,000

Kitchen Equipment 40,000

Furnishings 20,000

Total allowable cost 225,440

Chargeable Gain 52,560

I would really appreciate any advice / comments on the above

Yes, the sale will be subject to CGT.

Your computation is probably not to far off the mark.

However, the equipment won't be a deduction for CGT purposes - this cost would already have been partially / completely allowed as a deduction against income tax of the trade.

On the up side, you haven't included the cost of the land in your computation. Even if you inherited it, it must have some kind of base cost, which your professional advisor will be able to advise you on.
 
Thanks for your comments Mandelbrot
Good news on the land - may be additional costs there.
Re the equipment - I think I read somewhere that in the case of an asset which is used solely for the purposes of a business and qualifies for capital allowances, the full cost of such an asset qualifies as a deduction i.e. capital allowances claimed for Income Tax are disregarded. (unless there is a CGT loss in which case Capital allowances are taken into account in computing an allowable loss)
Would this not include my equipment above - i.e. even thought capital allowances were claimed under Income tax the original cost still qualifies as a deduction?
 
Thanks for your comments Mandelbrot
Good news on the land - may be additional costs there.
Re the equipment - I think I read somewhere that in the case of an asset which is used solely for the purposes of a business and qualifies for capital allowances, the full cost of such an asset qualifies as a deduction i.e. capital allowances claimed for Income Tax are disregarded. (unless there is a CGT loss in which case Capital allowances are taken into account in computing an allowable loss)
Would this not include my equipment above - i.e. even thought capital allowances were claimed under Income tax the original cost still qualifies as a deduction?

The following is taken from Revenue's Guide to CGT (http://www.google.ie/url?sa=t&sourc...SVjrQuKKw&sig2=N6_YhgMwmNj3EhIOOy0KmQ&cad=rja)

"1. Deductible expenditure
The amount of a chargeable gain or an allowable loss is determined by deducting any allowable expenditure from the
consideration received for the disposal. The allowable expenditure may include:
(a) the cost of acquisition of the asset and any incidental cost of acquisition such as agent’s commission and costs
of transfer or conveyance,
(b) expenditure incurred for the purpose of enhancing the value of the asset which is reflected in the state of the
asset at the time of disposal; expenditure to establish, preserve or defend legal title,
and
(c) the incidental costs of making the disposal, such as legal and selling costs.
The amounts under (a) or (b) above may be adjusted to take account of inflation (see paragraph 4 below).
If any part of the consideration received, or the expenditure within (a), (b) or (c) above, is taken into account in
computing any income or loss for the purposes of Income Tax or Corporation Tax on income, it must be excluded from
the calculation of a chargeable gain or an allowable loss on the disposal.
An exception is made in the case of
expenditure on the acquisition of certain shares which, even though the expenditure qualifies for relief from Income
Tax, may be deducted in computing a chargeable gain (but not an allowable loss) on a disposal of the shares (see
Chapter 6, paragraph 4)."


Totally open to correction on this, but that's always been my understanding of this area.

However, in your personal income tax return up to cessation, you should have accounted for a balancing allowance / charge on the self-supply of this equipment (i.e. the equipment ceased to be a business asset the day you ceased in business, and became an asset of you personally).

You can therefore include the value of the equipment on the day it diverted to personal use, as part of the cost of disposal. For example:

Equipment (40k) & Furnishings (20k) (2003) 60k
2003/04/05 Wear & Tear (12.5%) = 7.5k p.a.
Total wear & tear claimed 22.5k

Assuming there was no balancing allowance / charge then the assets were "worth" 37.5k to you when you ceased, and that amount can be claimed as enhancement expenditure. (You might want to check your IT return though to see if your accountant claimed that the equipment was only worth, say, 20k and claimed a balancing allowance of an extra 17.5k in 2006... that wouldn't be unusual in a case like yours.)

I'd be interested in anyone else's opinion on this one...?
 
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