Capital Gains & Other Taxes Manual - Section 5 - Part 2

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Introduction

5.21 General

5.22 Consideration for Disposal

Cost of Acquisition

5.23 General

5.24 Deemed Acquisition

5.25 Assets Created Not Acquired

Other Allowable Expenditure

5.26 General

5.27 Incidental Costs

5.28 Expenditure on Improvements etc

Indexation Allowance

5.29 General

5.30 History of the Indexation Allowance

5.31 Amount of Indexation Allowance (s.54)

5.32 Losses (s.53 as amended by the FA 1994)

Taper Relief

5.33 The relief

Business Assets

5.34 General

5.35 Circumstances When Old Rules Apply

5.36 April 1965 Valuation Election (Sch 2 para 17)

5.37 April 1965 Valuation Mandatory (Sch 2 para 9)

5.38 The Time Apportionment Formula (Sch 2 para 16)

5.39 Additional Expenditure (Sch 2 para 16(4))

5.40 Assets Having Small Acquisition Cost (Sch 2 para 16(5))

Part Disposals

5.41 General

5.42 The Part Disposal Formula (s.42(2))

5.43 Expenditure Wholly Attributable to Part (s.42(4))

5.44 Unit of Valuation

5.45 Previous Part Disposal - Re-basing Rules (Sch 3 para 4)

5.46 Previous Part Disposal - Pre Rebasing Rules (Sch 2 para 16(8))

5.47 Statement of Practice

Small Part Disposals

5.48 Deferment of Charge

5.49 General Relief (s.242)

5.50 Disposal to Authority with Compulsory Powers (s.243)

5.51 Acquisition Cost Exhausted

Wasting Assets (s.44-47)

5.52 General

5.53 Definition

5.54 Chattels

5.55 Chattels Which are Not Wasting Assets

Consideration Due after Time of Disposal (s.48)

5.56 General

5.57 Payment by Instalments (s.280)

5.58 Consideration Not Ascertainable

5.59-75 Reserved

Part 2 : Computation of Gains and Losses - Introduction

Introduction

5.21 General

The general rules governing the computation of chargeable gains and allowable losses are contained in Chapters III and IV of the TCGA 1992.

The computation essentially takes the following form, which is a very simplified example:

Disposal proceeds

 

£ A

Acquisition Costs

£ B

 

Indexation Allowance to April 1998*

£ C

 

Indexed Gain

 

£ D =£ A -(£ B + £ C )

Taper Relief

£ E

 

Chargeable Gain

 

£ D - £ E

*This time limit does not apply to Corporate taxation to which taper relief is not applicable.

5.22 Consideration for Disposal

The consideration for the disposal or part disposal is normally the price, premium, compensation, insurance money etc received and this will be ascertained by the Inspector.

Where there is no consideration, or the disposal is not at arms length, the disposal is generally deemed to be for a consideration equal to the market value of the asset and the Inspector may seek the DV's advice in determining this sum.

Cost of Acquisition

5.23 General

The cost of acquisition will normally be the price paid for the asset. However, for disposals occurring on or after 6 April 1988, if the asset was acquired before 31 March 1982 then it is deemed to have been sold and immediately re-acquired at its market value on that date. The 31 March 1982 value will then normally be adopted as the acquisition cost.

5.24 Deemed Acquisition

Where there is no consideration, or the asset was not acquired "at arms length" the acquisition is generally deemed to be for a consideration equal to the market value of the asset. A deemed disposal by a previous owner normally implies a deemed acquisition by the new owner at the same figure.

5.25 Assets Created Not Acquired

Where an asset has been created and not acquired eg goodwill, the cost of acquisition is replaced by the expenditure if any which has been incurred in creating the asset and this is normally dealt with by the Inspector.

Other Allowable Expenditure

5.26 General

In addition to the 'cost of acquisition' the following may also be deducted from the disposal proceeds:

the incidental costs of acquisition and disposal.

any expenditure on improving or enhancing the value of the property.

any expenditure on establishing, preserving or defending title to or rights over the asset.

5.27 Incidental Costs

Incidental costs include expenditure on:-

surveyors, accountants and legal fees.

costs of transfer or conveyance (including Stamp Duty).

costs of advertising to find a buyer or seller.

costs reasonably incurred in making any valuation or apportionment required for the purposes of the CGT computation.

It should be noted that the cost of making a valuation or apportionment does not extend to the cost of resolving any disagreement over it, whether by negotiation or litigation.

5.28 Expenditure on Improvements etc

Expenditure incurred on the asset for the purpose of enhancing its value is an allowable expense provided it is reflected in the state or nature of the asset at the time of disposal. DVs may be asked for advice as to whether the expenditure satisfies this test. In general the expenditure must be of a capital nature and any sums which are allowable as deductions against income (eg normal maintenance costs) are excluded.

Any expenditure which will be reimbursed from public funds (eg improvement grants or compensation for abortive expenditure) is excluded by s.50.

Indexation Allowance

5.29 General

The purpose of the indexation allowance is to remove from any chargeable gain the element of gain which is due to inflation. The allowance is basically calculated by multiplying the cost of acquisition and each item of allowable expenditure by the percentage increase in the Retail Price Index (RPI) from the date of acquisition or expenditure to the date of disposal.

5.30 History of the Indexation Allowance

The indexation allowance was first introduced in 1982 but it did not exclude all the inflationary gain for properties acquired before that date because it only took account of some of the increase in the RPI after that date and it was applied to the historic cost of acquisition and expenditure. The Finance Act 1985 amended the provisions so that where an asset was acquired before 31 March 1982 a taxpayer could, if they wished, claim an allowance based on the market value as at 31 March 1982 rather than the original acquisition cost. The effect of this was to remove all the inflationary gain occurring after March 1982 but still not any occurring before that date. The final step was the rebasing provisions contained in the Finance Act 1988 which now broadly provides that where assets were held on 31 March 1982 the gain will normally be completed by reference to the increase in value since that date. (see Appendix 22).

For non corporate taxpayers this allowance is frozen after 5 April 1998 but it is replaced by taper relief.

5.31 Amount of Indexation Allowance (s.54)

The amount of the allowance is calculated by applying an indexation factor to the acquisition cost, or 31 March 1982 value, and each item of allowable expenditure. The indexation factor is calculated as follows:-

RD – RI ÷ RI

Where RD = The RPI for the month in which the disposal occurs and

RI = The RPI for March 1982 or, if later, the month of acquisition or expenditure.

5.32 Losses (s.53 as amended by the FA 1994)

The Finance Act 1994 introduced restrictions on the extent to which indexation allowances can create a loss. For disposals on or after 30 November 1993 the amount of indexation allowance to be given in a computation is restricted to an amount which does not give rise to a loss or increase the amount of a loss.

Taper Relief

5.33 The relief

Taper relief for CGT was introduced in the 1998 Finance Act as a replacement for indexation. It applies to non corporate taxpayers (e.g. individuals, trustees, partnerships).

The relief works by reducing the amount of a chargeable gain according to the whole number of years the asset has been held since 5 April 1998. The greater the number of whole years up to a maximum of 10 the smaller the gain which is chargeable to tax.

A distinction is made between Business and Non Business Assets and the levels of relief for business assets have changed since 1998.

These tables show the rates:

Business Assets

* Note: This further amendment was announced in 2001. It will be included in the Finance Act 2002.

Disposal before April 2000

Disposal after April 2000

Disposal after April 2002 *

Complete years owned since 1998

% chargeable

Complete years owned since 1998

% chargeable

Complete years owned since 1998

% chargeable

1

92.5

1

87.5

Less 1 year

100

2

85

2

75

1 - 2 Years

50

3

77.5

3

50

3 or more

25

4

70

4 or more

25

   

5

62.5

       

6

55

       

7

47.5

       

8

40

       

9

32.5

       

10 or more

25

       

Non-Business Assets

No. of whole years in the qualifying period

Percentage chargeable

1

100

2

100

3

95

4

90

5

85

6

80

7

75

8

70

9

65

10

60

For Non-Business Assets actually held on 17 March 1998 a bonus year is added to the actual complete years of ownership

Pre Rebasing Rules - Assets Acquired Before 6 April 1965

5.34 General

In certain circumstances it is necessary for the Inspector to check the gain or loss that would have arisen under the rules that existed before the rebasing provisions in the Finance Act 1988 were introduced. Prior to rebasing the base date was 6 April 1965 and any gain arising prior to that date was excluded from the computation either by means of

adopting a deemed 1965 acquisition cost at market value or

using the time apportionment formula.

5.35 Circumstances When Old Rules Apply

Unless the taxpayer has made an election under s.35(5) to have gains and losses on all assets computed by reference to 31 March 1982 values then the Inspector will usually need to make two computations, one assuming a deemed acquisition of the asset on 31 March 1982 and a second using the old pre rebasing rules.

This comparison of the gain or loss under the two sets of rules is known as the 'kink test':-

  • If both computations result in a gain then the smaller gain is adopted.
  • If both computations result in a loss then smaller loss is adopted.
  • If one computation results in a gain and the other results in a loss the disposal is deemed to be at no gain/no loss.
  • If the computation under the old rules results in no actual gain or loss or the old rules deem there to be neither a gain nor a loss then the disposal is deemed to be at no gain/no loss whatever the value of the rebased gain or loss.

5.36 April 1965 Valuation Election (Sch 2 para 17)

A person may elect (but this is irrevocable) for the purposes of computing the gain, for a valuation as at 6 April 1965 on the assumption that the asset was sold and immediately reacquired at a market value on that date.

5.37 April 1965 Valuation Mandatory (Sch 2 para 9)

A 6 April 1965 valuation is mandatory on assets owned prior to that date where the disposal consideration reflects development value.

5.38 The Time Apportionment Formula (Sch 2 para 16)

The formula is based on the assumption that the gain realised on disposal has grown at an even rate annually throughout the period of the taxpayer's ownership. In a simple case where there is no additional expenditure the total gain will be apportioned to find the chargeable gain by using the formula:-

Chargeable gain =

Total gain x

T ÷ ( P + T )

Where T = period between 6.4.65 and date of disposal.

P = period of ownership prior to 6.4.65 (subject to a maximum of 20 years).

5.39 Additional Expenditure (Sch 2 para 16(4))

Where there is additional allowable expenditure the gain will first be apportioned pro rata to the respective items of expenditure and the time apportionment formula then applied to each item of expenditure substituting for P the period from the date the expenditure was incurred to 6.4.65. For expenditure after 6.4.65, P will be nil and the entire gain attributable to that expenditure is chargeable.

5.40 Assets Having Small Acquisition Cost (Sch 2 para 16(5))

The time apportionment formula may not work fairly when the acquisition cost is small and substantial expenditure is incurred at an earlier date. This is because most of the gain is attributed to the later expenditure. In such cases the gain arising from the enhancement expenditure is ascertained and the remainder of the gain is treated as being attributable to the original expenditure.

Part Disposals

5.41 General

As indicated in para 5.7 a part disposal can give rise to a chargeable gain (or an allowable loss).

5.42 The Part Disposal Formula (s.42(2))

The proportion of the costs of acquisition (or 1982 market value) and any additional expenditure attributable to the part disposed of is calculated by applying the formula:-

A

A + B

Where A = consideration for the part disposal and

B = market value of the remainder of the asset

The remaining costs are attributed to the property which is not disposed of.

5.43 Expenditure Wholly Attributable to Part (s.42(4))

Where on the facts of the case the expenditure is wholly attributable either to the part disposed of or the part retained, it need not be apportioned.

5.44 Unit of Valuation

Where there is a part disposal of an area of land which comprises a number of acquisitions, the rules for part disposals are applied to the smallest separate acquisition or number of acquisitions, which include the part disposed of.

5.45 Previous Part Disposal - Re-basing Rules (Sch 3 para 4)

Where there has been a part disposal of an asset after 31 March 1982 and before 6 April 1988, the allowable expenditure remaining after the part disposal is recomputed by reference to the 31 March 1982 value rather than cost. This enables the benefit of re-basing to be reflected in the computation of the gain is for any subsequent disposals occurring after 6 April 1988.

5.46 Previous Part Disposal - Pre Rebasing Rules (Sch 2 para 16(8))

When it is necessary to calculate gain or loss under the pre rebasing rules and there has been a part disposal after 6.4.65 then on a subsequent disposal of the retained interest the chargeable gain is:-

  • the gain on the retained interest from acquisition to the date of the part disposal (time apportioned if necessary); plus
  • the amount by which the final proceeds exceed the market value of the retained interest at the date of the part disposal.

5.47 Statement of Practice

By a Statement of Practice the Board, in 1971, gave taxpayers the opportunity to have gains computed as if the part disposed of was a completely separate asset. The Board's Statement is set out in Appendix 21. The DV will normally be asked to provide a valuation of the part disposed of at the date of acquisition of the whole asset.

The adoption of this basis may result in a material variation in the tax liability and it should be noted that the taxpayer cannot be obliged to adopt it.

Small Part Disposals

5.48 Deferment of Charge

Where there is a small part disposal of land which is not a wasting asset, then if the conditions set out in either para 5.48 or 5.49 are met, the taxpayer may elect to have the tax deferred to a subsequent disposal. On the subsequent disposal the allowable expenditure will be reduced by the amount of the consideration for the part disposal.

5.49 General Relief (s.242)

In order to qualify for this relief the value of the part disposed of must not exceed 20% of the market value of the entire holding and must not be a transfer between husband and wife or one within a group of companies.

This relief is not available if the consideration (or the aggregate of all considerations for disposals of land during that year) exceeds £20,000. But in assessing the aggregate of all considerations no account shall be taken of any part disposal to which para 5.49 applies.

5.50 Disposal to Authority with Compulsory Powers (s.243)

Relief is available where there is a disposal to an authority possessing compulsory powers providing that the consideration is small compared with the market value of the entirety (small is treated as less than 5%) and the taxpayer has not taken any steps by advertising etc, to dispose of the holding. It should be noted that the £20,000 limit does not apply to relief under this section.

5.51 Acquisition Cost Exhausted

In no case can the above relief operate where the allowable expenditure would become negative and in such circumstances a chargeable occasion will arise. The taxpayer may however elect to set any remaining allowable expenditure against the proceeds, instead of adopting the normal part disposal formula. There will then be no allowable expenditure to set against any subsequent disposals.

Wasting Assets (s.44-47)

5.52 General

Where there is a disposal of a wasting asset the expenditure incurred in acquiring, creating or improving the asset is written down due to the effluxion of time. Any indexation allowance is calculated on the written down amount.

5.53 Definition

Wasting assets are those having a predictable life of 50 years or less and include plant and machinery and life interests in settled property where the predictable expectation of life is less than 50 years.

Special Provisions apply to short leases (see s.240 and Sch 8).

5.54 Chattels

The disposal of a chattel which is a wasting asset is not chargeable unless it was or could have been the subject of a capital allowance.

5.55 Chattels Which are Not Wasting Assets

Chattels which are not wasting assets are exempt if the proceeds of disposal do not exceed £6,000.

Consideration Due after Time of Disposal (s.48)

5.56 General

Where the whole or part of the consideration is payable by instalments, the general rule is that the chargeable gain is based on the full value of all the instalments. No allowance is made for deferment, nor risk, nor the fact that a payment is contingent on some future event (such as obtaining planning permission for development).

The principle does not apply to mortgages granted by the vendor because in this case there is a disposal for full consideration.

5.57 Payment by Instalments (s.280)

Where the instalments are due for a period exceeding 18 months the tax may be paid by instalments, at the option of the person making the disposal, over a period not exceeding 8 years and ending not later than the time when the last instalment of the consideration is due.

5.58 Consideration Not Ascertainable

In cases where further payments become payable after disposal which cannot be ascertained at the date of disposal the chargeable gain on the disposal will be computed by including:-

  • the disposal proceeds which are ascertainable; and
  • the value, at the time of disposal, of the right to receive the further payments.

The right to receive the payments is then treated as a new and separate asset and any capital receipts will form a disposal (or part disposal) of the new asset. (See Practice Note 3 for detailed advice).

5.59-75 Reserved

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