Chapter 13 Corporate Capital Gains Flashcards
13.2 Computations of Gains
Start with sales proceeds and deduct incidental costs of sale. Then deduct the cost of the asset which will include enhancement expenditure and other incidental costs of acquisition. This gives the unindexed gain. We then deduct indexation allowance; this relief is frozen from 1 January 2018.
13.3 Indexation allowance
The indexation factor is computed using the following formula:
(RPI @ sale/31.12.17 - RPI @ acquisition)/ RPI @ acquisition
This is rounded to three decimal places; rounding does not apply to the disposal of shares acquired after 31 March 1985. We then multiply cost by the indexation factor.
13.4 Enhancement Expenditure
Enhancement expenditure is added to the base cost of the asset. It may need to be indexed separately if it occurs at a different date to the acquisition of the asset.
13.5 Capital Losses
Indexation cannot create or increase a capital loss; it can only reduce a gain to zero.
13.6 Corporate capital loss restriction
The maximum amount of brought forward capital losses which can be offset is the sum of:
• 50% of relevant chargeable gains, and
• The amount of the deductions allowance allocated to chargeable gains for the accounting period.
The deductions allowance is £5 million per singleton company, this applies to income and gains, companies can divide the allowance in any way of their choosing, between income and gains. The deductions allowance is also divided between group members, this is split as the group sees fit.
13.7 Rollover relief
Where a company sells one qualifying asset and purchases another qualifying asset within a specified period, the company can elect for the gain on the sale of asset 1 to be deducted from the base cost of asset 2. This defers the gain, as the base cost of the second asset is reduced by the gain on the first asset.
This applies when the company is selling assets used for the purposes of trade, if the asset is used for part of the trade apportionments are made. Qualifying assets include land and buildings and fixed plant and machinery.
The specified period during which asset 2 is purchased is one year before the disposal of asset 1 to three years afterwards.
The company must claim rollover relief within 4 years of the end of the accounting period of the disposal of asset 1, or the accounting period in which asset 2 is acquired.
13.9 Rollover relief – depreciating assets
A depreciating asset is either a wasting asset (useful life of less than 50 years) or will become a wasting asset within the next ten years. It has a useful life of less than 60 years. Plant and machinery is regarded as being this.
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 frozen gain crystallizes on the earliest of three events:
• The depreciating asset is sold
• The company stops using the plant and machinery within its trade
• Ten years after the acquisition of the depreciating asset.
13.10 Shares
The share matching rules determine the order in which shares are deemed to have been sold. The rules apply to shares of the same class and company. The rules are as follows:
• The company is deemed to have sold any shares it acquired on the same day
• The next shares deemed to have sold are those acquired in the previous nine days (FIFO basis). No indexation allowance is given on these shares
• Then the disposal is matched with share acquisitions from 1 April 1982 to nine days before the disposal, which are pooled together and form one asset in the section 104 pool. This is an indexed pool. To calculate indexation allowance, any acquisitions from 1 April 1982 to 31 March 1985, index each acquisition and include them in the pool. From 1 April 1985 indexation is calculated on the pool as a whole. If there are multiple acquisitions in the pool, each share in the pool is treated as having a base cost equal to the average cost of the shares in the pool at the date of disposal.
13.11 Paper for paper exchanges
For companies any loans that are treated as a loan relationship is a qualifying corporate bond. Where shares are received in exchange for the disposal of shares, there is no disposal for CGT purposes. The gain is deferred, the new shares take the base cost of the old shares.
If cash is received as well, there will be a part disposal and indexation will be available.
Where shares are replaced by QCBs (a loan relationship) in a reorganization, the shares are treated as though they have been disposed of at market value and the resulting gin or loss is deferred and only recognized on the disposal of the QCB. The QCBs are subject to the normal loan relationship rules.
However where a QCB (a loan relationship) is replaced by shares or other QCBs, there is no deferral of the gain or loss and there is an immediate recognition. The gain or loss is brought into the loan relationship provisions rather than the chargeable gains rules. The new shares or QCBs are treated as being acquired at market value.
