Readers’ forum: How is the gain on ultimate sale of property calculated?

My client purchased a plot of land in 1985 and built a rental property on it in the following year. After 20 years that property was demolished and a new larger property was built on the land. This was again rented out. She is now intending to sell the freehold of the land and property. She has asked me whether or not she can include the costs of building and then demolishing the old property in the calculation of the gain on the ultimate sale.

Had she purchased the land with the original property already built then I think that the answer would have been ‘yes’ as the land and buildings are treated as one asset. But because the old property was built after the purchase of the land it counts as enhancement expenditure and as it is no longer reflected in the state of the property when...