What is the enhancement expenditure for CGT?
Answered 17 March 2026
Here is a comprehensive answer on enhancement expenditure for CGT purposes.
Enhancement Expenditure for CGT
What the law says
Enhancement expenditure is defined under TCGA 1992, s.38(1)(b). The allowable deductions from the consideration in computing a capital gain are restricted to:
"the amount of any expenditure wholly and exclusively incurred on the asset by him or on his 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 him in establishing, preserving or defending his title to, or to a right over, the asset"
There are therefore three cumulative requirements for enhancement expenditure to qualify:
- It must be incurred wholly and exclusively on the asset for the purpose of enhancing its value;
- It must be reflected in the state or nature of the asset at the time of disposal; and
- It must not be interest (which is excluded by s.38(3)).
HMRC guidance / practice
The "reflected in state or nature" test
HMRC emphasises that if expenditure has proved futile or has wasted away before the disposal, it does not qualify as enhancement expenditure because it is not reflected in the state or nature of the asset at the time of disposal.
Lord Emslie in Aberdeen Construction Group Ltd v CIR [1978] 52 TC 281 explained the test as follows:
"what [Section 38(1)(b)] is looking for is, as the result of relevant expenditure, an identifiable change for the better in the state or nature of the asset, and this must be a change distinct from the enhancement of value"
Where a disposal is made under contract, the cut-off point for qualifying expenditure is the point of actual change of ownership (not the date of unconditional contract), as confirmed in Chaney v Watkis [1986] 58 TC 707.
What does and does not qualify
Money's worth given for the purpose of enhancing the value of an asset can constitute qualifying expenditure (Chaney v Watkis, 58 TC 707).
The following do not qualify as enhancement expenditure:
- Payments of rent and service charges in respect of a property held on lease (Emmerson v Computer Time International Ltd 50 TC 628);
- The value of an individual owner's own labour on alterations and improvements to an asset (Oram v Johnson, 53 TC 319).
Capital contributions to companies
A capital contribution paid to a company does not constitute enhancement expenditure on the shares in that company, as it does not represent expenditure reflected in the state or nature of the shares at the time of disposal. This was confirmed in The Trustees of the F. D. Fenston Will Trusts v HMRC (SpC589/07).
Distinguishing s.38(1)(a) from s.38(1)(b)
Where capital expenditure is incurred between acquisition and final disposal, it may be necessary to determine whether it falls under (a) (acquisition cost) or (b) (enhancement expenditure). For example, a subscription to a rights issue falls within (a), whereas the cost of extending a building or a payment to a sitting tenant for vacating a property falls within (b).
Practical example
In a worked example, a property bought for £80,000 with an extension costing £20,000 built after March 1998: the £20,000 is treated as enhancement expenditure and deducted in computing the gain, but no indexation allowance is available on it as it was incurred after 31 March 1998.
Citation sources
Where shares are disposed of in a company to which a capital contribution has been paid a claim may be made for a deduction in respect of that contribution in the capital gain computation. The claim will normally be for the contribution to be allowable as enhancement expenditure under TCGA92/S38 (1) (b). Although a capital contribution will typically affect the value of the shares in the company to which the contribution is made, it does not represent either expenditure on the shares, or expendi
This example illustrates the freezing of indexation allowance for disposals made on or after 6 April 1998, except for disposals made by companies within the charge to Corporation Tax. In June 1987 Miss D buys an investment property for £80,000. In July 1998 she has an extension built onto the property at a cost of £20,000. Then in September 1999 she sells the property for £180,000 less costs of £2,000. - - Amount - Disposal Proceeds 180,000 LESS Costs of disposal 2,000 - - 178,000 LESS Cost of a
he case of the acquisition of an asset, with costs of advertising to find a seller, and b in the case of a disposal, with costs of advertising to find a buyer and costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation of the gain, including in particular expenses reasonably incurred in ascertaining market value where required by this Act. 3 Except as provided by section 40, no payment of interest shall be allowable under this section. 4 An
y be worthwhile to examine critically a claim that money’s worth has been given as enhancement expenditure if the recipient of the money’s worth is connected with the claimant, see CG14580+,or there are any other grounds for suspecting that the enhancement of the value of an asset may not have been the sole purpose for which the money’s worth was given. Make such examination with a view to establishing whether the expenditure so incurred is expenditure wholly and exclusively on the asset for the
To the extent that money’s worth is given for the purpose of enhancing the value of an asset, the money’s worth so given constitutes expenditure incurred. See Chaney v Watkis, 58TC707. However, the following do not qualify as enhancement expenditure: payments of rent and service charges in respect of a property held on lease - Emmerson v Computer Time International Ltd (in liquidation) 50TC628. the value of an individual owner’s own labour on alterations and improvements to an asset - Oram v Joh
Part II General Provisions relating to computation of gains and acquisitions and disposals of assets Chapter III Computation of gains: General provisions Allowable deductions Acquisition and disposal costs etc. 38 1 Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to— a the amount or value of the consideration, in money or money’s worth, given by him
Enhancement expenditure must be reflected ‘in the state or nature of the asset at the time of the disposal’ (s38(1)(b)). If any expenditure has proved futile or has wasted away before the disposal then this does not qualify as enhancement expenditure because it is not reflected in the state or nature of the asset at the time of disposal. Lord Emslie commented on this test in Aberdeen Construction Group Ltd v CIR [1978] 52 TC 281 at page 290 ` ….. what [Section 38(1)(b)] is looking for is, as th