Chapter 23 Assets Lost or Destroyed

Question 1

calculation of the gain and rollover relief

Answer 1

If an individual receives a capital sum as compensation for the loss or destruction of an asset, this is a disposal for CGT purposes. The date of disposal is the date the capital sum was received. If an asset is just damaged and not destroyed this is treated as a part disposal for CGT purposes.
Calculation of the gain – the sale proceeds is the capital sum received. If an asset is lost or destroyed but no proceeds are received, the individual makes a capital loss. To calculate the gain, we deduct the cost by the insurance money received. If the asset still has residual or scrap value, this is added to the capital sum received.
Rollover relief – section 23 allows a form of rollover relief to defer the capital gain when an asset is lost or destroyed. If within 12 months of the receipt of the capital sum, the individual replaces his asset, they can make a rollover relief. The capital gain can be rolled over and set against the base cost of the new asset.
Before a rollover relief claim can be made you must meet certain conditions. The replacement asset must be a chargeable asset for CGT purposes, if the individual retains part of the insurance proceeds, the amount of cash is immediately charged. The relief must be formally claimed no later than 4 years from the end of the tax year of disposal.

Question 2

Negligible value claims

Answer 2

Negligible value claims – made by a taxpayer if an asset in their possession becomes worthless (most common for shares when a company goes into liquidation). The effect of the claim is the owner can pretend to sell his asset and the proceeds are equal to its current market value (most cases 0). This causes a capital loss to arise at the date of the deemed disposal. The loss can be treated as a current year loss or use the loss in any of the two years immediately preceding the claim. This option to effectively carry back the loss for two years, is only available when HMRC are satisfied the asset was of negligible value in those two years.