Chapter 12 Corporate capital gains Flashcards
12.1 Introduction
A company pays corporation tax on capital gains, they include gains as part of their taxable total profits. Unlike individuals’ companies can claim indexation allowance on gains, this did freeze in December 2017 though. Companies are not entitled to an annual exempt amount and are not eligible for business asset disposal relief.
12.2 Computation of gains
You start with the sales proceeds and deduct any incidental cost of sale. We then deduct the cost of the asset and any enhancement expenditure and other incidental costs of acquisition. This gives the unindexed gain. We then deduct the indexation allowance.
12.3 Indexation Allowance
The indexation factor is calculated by taking the movement in the retail price index between the date of acquisition of the asset and the earlier of 31 December 2017 and the date of sale. The indexation factor is calculated using the formula:
((Indexation at sale/ 31.12.17) – RPI at acquisition) / RPI at acquisition
The result is rounded to three decimal places. We then multiply cost by the indexation factor.
12.4 Enhancement Expenditure
This is added to the base cost of the asset. It may need to be indexed separately if the enhancement occurs at a different date to the acquisition of the asset. No indexation is available if the expenditure occurred on or after 1 January 2018.
12.5 Capital Losses
Indexation cannot create or increase a capital loss; it can only reduce the gain to zero.
12.6 Corporate capital loss restriction
The restriction in the amount of brought forward capital losses occurred after 1 April 2020. The amount of brought forward capital losses that may be offset is the sum of:
• 50% of the relevant chargeable gains, and
• The amount of the deductions allowance allocated to chargeable gains, known as the chargeable gain’s deductions allowance
An annual deductions allowance of £5 million per singleton company was introduced on 1 April 2017. For assets sold on or after 1 April 2020 this deductions allowance must be split between income and capital losses. Companies may divide the deductions allowance in any way they choose between trading income losses, non-trading income losses and capital losses.
12.7 Rollover Relief
Where a company sells one qualifying asset and purchases another qualifying asset within a specified period, they can elect for the gain of the sale of one asset to be deducted from the base cost of the other asset, and no tax will be paid. The effect is deferring the gain of the original asset. The rules apply to assets used for the purposes of trade, if only part of the asset is used in trade or the company only has part ownership, apportionments are made. Qualifying assets include:
• Land and buildings, and
• Fixed plant and machinery
The specified period is one year before the disposal of the asset to 3 years after the sale. The company must claim rollover relief within four years of the end of the accounting period.
12.9 Rollover relief – depreciating assets
A depreciating asset for chargeable gains purposes is similar to a wasting asset (useful life less than 50 years). A depreciating asset is an asset with a useful life not exceeding 60 years. Plant and machinery is regarded as a depreciating asset.
Where the asset purchased is a depreciating asset, we do not take the gain on the original asset and roll it over against the base cost of the replacement. Relief is given by freezing the gain on the old asset for a certain period of time.
The gain crystallizes on the earliest of three events:
• The depreciating asset is sold
• The company stops using the asset in trade
• Ten years after the acquisition of the depreciating asset
12.10 Shares
The share matching rules determine the order in which shares are deemed to have been sold, companies have different rules to individuals. The rules only apply to shares of the same class in the same company. The matching rules for companies are as follows:
• First, the company is deemed to have sold any shares it acquired on the same day
• The next shares deemed to have been sold are those acquired in the previous 9 days, on a FIFO basis. No indexation is given on those shares.
• Then the disposal will be matched with share acquisitions from 1 April 1982 to 31 March 1985, index each acquisition and include them in the pool. From 1 April 1985 to 31 December 2017, indexation is calculated on the pool as a whole and is not rounded to three decimal places. There is no indexation after 1 January 2018. Each share in the pool is treated as having a base cost equal to the average cost of the shares in the pool as the date of the disposal
