Computation of gains: Special rules

Question 1

The basic pro forma for calculating gains on the disposal of assets is adapted by special rules in the following circumstances:

Answer 1

• transfers between spouses or civil partners
• part disposals
• chattels and wasting assets
• assets lost or destroyed
• damaged assets

Question 2

Where an asset is transferred between spouses or civil partners:

Answer 2

• no gain or loss arises on the transfer
• any actual proceeds are ignored
• the transferor is deemed to dispose of the asset at its acquisition cost
• the deemed proceeds of the transferor are treated as the deemed acquisition cost of the transferee (i.e. the recipient spouse acquires the asset at its original acquisition cost).
  On a subsequent disposal of the transferred asset by the transferee, the deemed acquisition cost is the original acquisition cost to the first spouse

Question 3

Married couples and civil partners can transfer assets between them to maximise the use of:

Answer 3

• each individual’s annual exempt amount
• each individual’s basic rate band
• capital losses

Question 4

Part disposals - The allowable cost of the part of the asset disposed of is calculated using the following formula:

Answer 4

Cost x A/(A+B)
A= Value of the part disposed of
B = Market value of the remainder at the time of the part disposal

Question 5

Part disposal - allowable cost

Answer 5

• calculated using the formula, is then used in the basic capital gains tax computation as normal

Question 6

Part disposal - incidental costs or acquisition or enhancement expenditure, relating to:

Answer 6

• solely the part of the asset being disposed of = deducted in full in the chargeable gain calculation
• the whole asset (rather than just the part being disposed of) = apportioned in the same way as cost

Question 7

What are the chattels?

Answer 7

• are defined as tangible movable property (picture or table)
  The asset must be:
• movable - therefore a building is not a chattel
• tangible - therefore shares are not chattels

Question 8

What is a wasting asset?

Answer 8

• is an asset with a predictable life not exceeding 50 years

Question 9

Wasting chattels expected life and examples

Answer 9

• not exceeding 50 years
• greyhound
• boat
• plant and machinery
• racehorse

Question 10

Non-wasting chattels expected life and examples

Answer 10

• more than 50 years
• antiques
• jewellery
• paintings

Question 11

Certain disposals of chattels are exempt from capital gains tax:

Answer 11

Wasting chattels
- chattels eligible for capital allowances
(e.g. plant and machinery used in a business - unless bought and sold for less or equal to £6,000
Non-wasting chattels
- acquired and disposed of for less or equal to £6,000

Question 12

When a non-wasting chattel is disposed of the following rules apply:

Answer 12

1. asset bought and sold for £6,000 or less = exempt
2. asset bought and sold for more than £6,000 = the chargeable gain is computed the normal way
3. asset either bought or sold for £6,000 or less = special rules apply:
   Sold at a gain
   -calculate the chargeable gain as normal but the gain is restricted to a maximum of
   5/3 x (gross disposal consideration - £6,000)
   Sold at loss
   - the loss is restricted because gross sale proceeds are deemed £6,000

Question 13

Wasting assets can be split into the following categories:

Answer 13

• chattels not eligible for capital allowances = exempt from CGT
• chattels eligible for capital allowances
• other wasting assets

Question 14

Wasting assets eligible for capital allowances sold at a gain:

Answer 14

• calculate the gain as normal, applying the £6,000 rule if applicable
• any capital allowances given over the life of the asset will have been clawed back with a balancing charge on disposal

Question 15

Wasting assets eligible for capital allowances sold at a loss

Answer 15

• is restricted as relief for the loss has already been given through the capital allowances system
• in capital loss computation, the net capital allowances are deducted from the allowable expenditure
• plant and machinery which is eligible for capital allowances and sold at a loss, results in a no gain/ no loss situation for CGT purposes

Question 16

Wasting assets that are not chattels

Answer 16

• they are not tangible and/or not movable (e.g. copyright)
• the allowable expenditure on these assets is deemed to waste away over the life of the asset on a straight line basis

Question 17

Wasting assets that are not chattels when a disposal is made:

Answer 17

• the allowable expenditure is restricted to take account of the asset’s natural fall in value
• the asset’s fall in value is deemed to occur on a straight line basis over its predictable useful life
• the allowable cost is calculated as:
  Cost x (Remaining life at disposal/ Estimated useful life)

Question 18

Assets lost or destroyed or damaged the rules vary according to whether:

Answer 18

• the asset has been completely lost/destroyed or merely damaged
• the owner has replaced or restored the asset

Question 19

Assets lost or destroyed - no insurance proceeds

Answer 19

Compute a capital loss using the normal CGT computation:
- disposal proceeds are £Nil
- deduction of the allowable expenditure will create a loss

Question 20

Assets lost or destroyed - insurance proceeds received - no replacement of asset

Answer 20

Chargeable gain/loss is computed using the normal CGT computation pro forma. The insurance proceeds received are the proceeds in the CGT pro forma

Question 21

Assets lost or destroyed - insurance proceeds received - asset replaced within 12 months

Answer 21

• the taxpayer can claim that the destruction/loss of the asset is treated as no gain/no loss
• if the insurance proceeds are greater than the deemed disposal proceeds under the no gain/no loss computation, the excess is deducted from the replacement asset’s allowable cost

Question 22

Assets lost or destroyed - insurance proceeds received - partially used to replace asset within 12 months

Answer 22

• there is an immediate chargeable gain in respect of the excess proceeds that are not reinvested in the replacement asset
• the remainder of the gain can be deferred by electing for the no gain/ no loss treatment in above

Question 23

What if asset is damaged?

Answer 23

• no implications for capital gains tax purposes unless compensation is received
• when compensation is received there is a part disposal for capital gain tax purposes

Question 24

Assets damaged - The allowable cost is calculated using the normal disposal formula:

Answer 24

Cost x A/A+B
A = compensation received
B = market value of the remainder at the time of the part disposal (i.e. value in its damaged condition)

Question 25

Assets damaged - The computation is varied depending on how the insurance proceeds are applied:

Answer 25

1. Proceeds not used in restoration work
   - normal part disposal capital gains computation is used
   - the value of the part retained is the value of the asset in its damaged condition
2. Proceeds fully used in restoration work
   - all of the insurance proceeds are used in restoring the asset the taxpayer may claim to deduct the proceeds from the cost of the asset rather than be treated as having made a part disposal of the asset
   - this is a form of rollover relief