20. Computation of tax: special rules

Question 1

How is an asset treated when transferred between spouses?

Answer 1

• No gain or loss
• Actual proceeds ignored
• Transferor is deemed to dispose of the asset at its acquisition cost so when they sell this is the acquisition cost to the other spouse

Question 2

What tax planning opportunities arise from the marital chargeable gains tax benefits? (3)

Answer 2

• Couples maximise AEAs
• Can relieve unused capital losses
• Utilisation of both individuals tax rate bands

Question 3

What is the formula for when as asset is only partly disposed and sold?

Answer 3

Cost x A(A+B)

A = market value of part of asset being sold
B = market value of part of asset retained

Question 4

How do you treat enhancement expenses or incidental costs of a partly sold disposal?

Answer 4

If they relate solely to part sold = deduct in full

If they relate to the whole asset = apportioned in the same way as cost.

Question 5

What is a chattel?

What is the difference between a wasting and non-wasting chattel?

Answer 5

a chattel is a TANGIBLE and MOVEABLE property.

A wasting chattel has a life expectancy of less than 50 years so is EXEMPT from capital gains tax and RELIEF from losses.

A non-wasting chattel has a life exceeding 50 years and is TAXED USING 6000 rules.

Question 6

What are the options for taxing non-wasting chattels?

Answer 6

• Proceeds and costs less than £6000 each: tax exempt.
• Proceeds and costs both above £6000 each: chargeable gains/loss as normal
• Sold at a gain (over £6000) Proceeds above £6000 but costs less than £6000: gain is the lower of:
  
  • Normal gain
  • 5/3 x (gross proceeds - £6000)
• Sold at a loss (under £6000) Proceeds less than £6000 but costs above £6000: allowable loss restricted as gross proceeds deemed £6000

Question 7

How do you treat plant and machinery for capital gains tax?

Answer 7

Usually seen to have a life of less than 50 years so usually exempt.

Not exempt if used for purpose of trade and was eligible for capital allowances.

If sold at gain: see 6000 rules.
If sold at loss: no capital loss relief given as already obtained through capital allowances.

Question 8

What is the formula for other wasting assets which are not chattels?

Answer 8

Original full cost x (remaining life at disposal / estimated life by acquisition).

Question 9

How do you treat assets which are lost, destroyed or damaged?

Answer 9

If lost or destroyed and no insurance claim: capital loss of value.

Insurance proceeds fully used to replace asset within 12 months: asset disposed of at no gain no loss.

Insurance proceeds in excess are deducted from allowable cost of replacement asset.

If not all insurance proceeds used, an immediate rechargeable gain arises on excess.