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Hi Sir,
Could you please explain why improvements cost in the example below are not added to the market value of the property? Based on my understanding improvements cost should be added to the purchase price or market value if incurred before the start of the of the tax year.
(1). Richard’s employer has provided him with living accommodation since 1 June 2010. The property was purchased on 10 May 2003 for £162,000, and was valued at £198,000 on 1 June 2010. Improvements costing £7,000 were made to the property during November 2007. On what figure will Richard’s additional living accommodation benefit be calculated for the tax year 2013-14?
A £198,000
B £94,000
C £123,000 = 198,000 – 75,000 – correct answer
D £169,000My answer would be: (198,000 + 7,000) – 75,000
You have correctly used the OMV of 198,000 instead of the cost, as the property had been purchased by the employer more than 6 years before he moved in. However look at the date of the improvements, it was before he moved in so that the OMV will already account for the earlier improvement cost! If the improvement had been dated post June 2010 then you would have added it in.
Hi Sir,
If I understood well your explanation above, I should look at the date of the improvements cost and if the improvements cost was before the employee moved in, the OMV has already accounted for the earlier improvements cost.
Could you please explain why improvements cost of 14,000 in the example below is added to the purchase price of the property, since the improvement cost occurred before the employee moved in?
Vigorous plc has provided Andrea with living accommodation since 1 November 2011. The property was purchased on 1 January 2009 for 130,000. The company spent 14,000 improving the property during March 2010, and a further 8,000 was spent on improvements cost during May 2013.
The value of property on 1 November 2011 was 170,000 and it has annual value of 7,000.
Solution: ((130,000 + 14,000) – 75,000) * 4%
Look at the answer I gave you and look at the difference between the questions you are attempting. In this latest question we are NOT using the OMV we are using the COST as the employee occupied the property within 6 years of acquiring the property – we must therefore add the improvement to the original cost!
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