Chargeable gains for companies

Question 1

Chargeable gains for company

Answer 1

The total net chargeable gains that a company makes during an accounting period are included in the taxable total profits computation
- companies pay corporation tax on chargeable gains, not capital gains tax
- no annual exempt amount available for companies

Question 2

Calculation of total net chargeable gains for a company, steps

Answer 2

1 Calculate the chargeable gain/allowance loss arising on the disposal of each chargeable asset separately
2. Calculate the net chargeable gains arising in the AP = Chargeable gains less allowable losses
3. Deduct capital losses brought forward = total net chargeable gains
4. Include in taxable total profits computation

Question 3

Pro forma - companies , calculation

Answer 3

Disposal proceeds x
Less Incidental disposal costs (x)
= Net proceed x
Less: Allowable expenditure (x)
= Unindexed gain x
Less: Indexation allowance (x)
= Chargeable gain/ allowable loss x/(X)

Question 4

Difference when dealing with the disposal of assets by companies

Answer 4

• the treatment of capital losses
• the treatment of shares and securities
• the availability of reliefs

Question 5

What is indexation allowance?

Answer 5

• gives a company some allowance for the effect of inflation in calculating a gain

Question 6

The rules for the indexation allowance:

Answer 6

• applies to assets purchased prior to December 2017
• is calculated as: cost of asset x indexation factor
• the indexation factor is the movement in the retail price index from the month of purchase to the moth of disposal or December 2017 if earlier
• is calculated separately for each item of expenditure
• create or increase a capital loss

Question 7

Capital losses regarding chargeable gains for companies

Answer 7

• arises if the proceeds received for an asset are lower than the allowable expenditure
• the indexation allowance cannot create or increase a capital loss

Question 8

Utilisation of a capital loss

Answer 8

• where allowable losses arise, they are set off against chargeable gains arising in the same accounting period
• any loss remaining, is carried forward against chargeable gains of future accounting periods, as soon as they arise
• capital losses cannot be:
• set off against any other income of a company, nor
• carried back against gains in previous accounting periods

Question 9

Matching rules for shares for companies

Answer 9

1 shares acquired on the same day as the sale
2 shares acquired during the nine days before the sale FIFO basis
3 shares in the share pool

Question 10

Calculation of gains on same day and previous 9 day purchases

Answer 10

Sale proceeds x
Less: Allowable cost (x)
= Chargeable gain x

Question 11

The share pool for companies is different from the share pool for individuals:

Answer 11

• it contains shares in the same company, of the same class, purchased more than 9 days before the date of disposal
• the pool keeps a record of:
  # number of shares acquired and sold
  # cost of the shares, and
  # indexed cost of the shares (i.e. cost plus IA)
• each purchase and sale is recorded in the poo, but the indexed cost must be updated before recording the ‘operative event’
• when shares are disposed of out of the share pool, the appropriate proportion of the cost and indexed cost which relates to the shares disposed of calculated on an average cost basis

Question 12

Calculation of the gain on shares in the share pool

Answer 12

Sale proceeds x
Less: cost (w1) (x)
= Unindexed gain x
Less: Indexation allowance (w2-w1) (x)
= chargeable gain
W1 = calculates the average pool cost of shares disposed of
W2 = calculates the average indexed cost of shares disposed of

Question 13

Bonus and rights issue key points regarding chargeable gain for companies

Answer 13

• a bonus issue is the distribution of free shares to shareholders, based on existing shareholdings
• a rights issue involves shareholders paying for new shares, usually at a rate below market price and in proportion to their existing shareholdings
• in both cases, the shareholder is making a new acquisition of shares
• for matching purposes, such acquisitions arise out of the original holdings. They are not treated as a separate holding of shares
• bonus and rights issues therefore, attach to the original shareholdings, for the purposes of the identification rules

Question 14

Bonus issues - chargeable gains for companies

Answer 14

• is a free shares, there is no indexation to be calculated
• bonus issue is not an operative event in the share pool
• simply, add the bonus issue shares to the share pool at nil cost

Question 15

Rights issue - chargeable gains for companies

Answer 15

• is a simply a purchase of shares usually at a price below the market rate
• it should be treated as an operative event, in the same way as a normal purchase in the share pool:
  # index up to the date of the rights issue (or December 2017, if earlier)
  # add in the number of shares and their cost

Question 16

Where the consideration for the reorganisation or takeover only involves the issue of shares in the acquiring company, the tax consequences are:

Answer 16

• no chargeable gain arises at the time of the reorganisation or takeover
• the cost of the original shares becomes the cost of the new shares
• where the shareholder receives more than one type of share, in exchange for the original shares:
  # the cost of the original shares is allocated to the new shares
  # by reference to the market values of the various new shares
  # on the fist day of dealing in them after the reorganisation/takeover

Question 17

Mixed consideration when both cash and shares are received on a takeover:

Answer 17

• there is a part disposal of the original shares
• a chargeable gain arises on the cash element of the consideration
• the calculation of the chargeable gain is the same as for individuals except that indexation allowance must be taken into account

Question 18

Summary of rollover relief to companies:

Answer 18

• ROR allows a company to replace assets used in its trade, without incurring a corporation tax liability on the related chargeable gains
• the gain arising on the disposal of the business asset, is deducted from, the acquisition cost of the new asset
• provided the proceeds are fully reinvested, no tax is payable at the time of the disposal
• common asset which qualify for ROR: land and buildings that are both occupied and used for trading purposes and fixed plant and machinery
• the acquisition of the replacement asset, must occur during a period that begins one year before the sale of the old asset and ends three years after the sale
• the new asset must be brought into use in the trade when it is acquired
• where disposal proceeds of the old asset are not fully reinvested, the surplus retained, reduces the amount of chargeable gain that can be rolled over
• when an asset has not been used entirely for business purposes throughout the company’s period of ownership, ROR is scaled down in proportion to the non-business use
• if reinvested is in a depreciating asset, the chargeable gain is deferred until the earliest of:
  # disposal of the depreciating asset
  # depreciating asset ceases to be used for trading purposes
  # 10 years after the depreciating asset was acquired
• any asset with a predictable life of not more than 60 years, is a depreciating asset
• if a new non-depreciating asset is acquired before the deferred gain becomes chargeable, ROR can be claimed and the deferred gain is deducted from the base cost of the new non-depreciating asset

Question 19

The key differences in the rules for companies are as follows:

Answer 19

sold

• goodwill is not a qualifying asset for companies
• the gain deferred is the ‘indexed gain’(the gain after IA)
• claim must be made within four years of the later of the end of the accounting period in which the asset is
  # replaced
  #sold