Revenue Note for Guidance

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Revenue Note for Guidance

555 Restriction of losses by reference to capital allowances and renewals allowances

Summary

Special treatment is provided in respect of expenditure which, although indirectly allowable for income tax or corporation tax in the form of capital allowances or renewals allowances, is nevertheless capital outlay. Notwithstanding section 554, such capital outlay is an allowable deduction for capital gains tax purposes. However, where a loss accrues on the disposal, the amount of the loss allowable is restricted to the extent that it has been covered by the amount of capital allowances or renewals allowances granted for income tax or corporation tax purposes.

Details

(1) Expenditure which has qualified for capital allowances (defined in section 5) or renewals allowances (defined in section 544) is not on that account ineligible for deduction in computing chargeable gains. Thus, irrespective of capital allowances or renewals allowances granted in respect of an asset for income or corporation tax purposes, the full cost of the asset is deductible in computing chargeable gains. Where, however, a loss arises on the disposal of the asset, the amount of the loss available for set-off against chargeable gains is restricted by any capital allowances or renewals allowances granted.

(2) Certain transfers of assets are treated as made at the written down value of the asset for income tax or corporation tax purposes. These are transfers —

  • to which section 289(6) (assets gifted or sold under an agreement to use income tax or corporation tax written down values) applies;
  • by means of a sale in relation to which an election under section 312(5) (arrangements where the buyer is under the control of the seller) was made;
  • to which section 295 (succession to a trade under a will or intestacy) applies.

In such cases the asset is deemed for capital gains tax purposes to have been acquired at market value. However, the written down value of the asset for income tax or corporation tax purposes may be less than the amount of the consideration applicable for capital gains tax purposes and the second owner may only have entitlement to a small amount of capital allowances. The result of this would be that the restriction of losses for capital gains tax purposes by reference to the capital allowances of the second owner on the disposal by that owner of the asset would not in itself be sufficient to prevent the emergence of artificial losses for capital gains tax purposes. To prevent artificial losses emerging in such cases, it is provided that in the restriction of losses for capital gains tax purposes account is taken of the capital allowances granted to the first owner as well as those of the second owner. The provision also covers a series of similar transfers.

Example

Asset – cost to A

100,000

Capital allowances allowed to A

15,000

Written down allowances allowed to B

85,000

Capital allowances allowed to B

15,000

B’s written down value

70,000

B sells the asset for

50,000

Balancing allowance to B

20,000

If at the time of the transfer to B the market value of the asset is 90,000 —

A’s capital gains tax position is —

Cost

10,0000

Consideration on disposal

90,000

Loss

10,000

Restrict by capital allowances granted

15,000

The result is treated as no gain and no loss.

B’s capital gains tax position is —

Cost

90,000

Consideration on disposal

50,000

Loss

40,000

Restrict by capital allowances granted

B’s allowances (15,000 + 20,000)

35,000

A’s allowances

15,000

50,000

The result is treated as no gain and no loss.

(3) Provision is made to put beyond doubt that the capital allowances to be taken into account for the purposes of restricting capital gains tax losses arising on disposal of the asset include balancing allowances. However, the capital allowances to be so taken into account are to be reduced by the amount of any balancing charge arising on the disposal of the asset, including a balancing charge which is not brought into assessment because the taxpayer elects under section 290 to have it applied by reducing the cost of a replacement asset for capital allowance purposes.

Example

Industrial building cost

200,000

Capital allowances granted

160,000

Written down value

40,000

Building sold for

190,000

Cost allowable

200,000

Loss on disposal

10,000

Capital allowances granted

160,000

Less balancing charge

150,000

Relevant Date: Finance Act 2020