Revenue Note for Guidance

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Revenue Note for Guidance

559 Assets derived from other assets

Summary

Expenditure can be followed through changes in the form or nature of assets due to the merging of assets, the creation of rights in or over assets or the extinction of rights in or over assets. A proportion of the expenditure attributable to the original asset is apportioned to the asset derived from it.

Details

(1) Where the value of an asset is derived from another asset in the same ownership, a proportion of the allowable expenditure referable to the original asset is to be attributed to the asset derived from it. An asset can be derived from another through the merger of assets or the creation of rights or interests in or over an asset.

(2) The basis of apportionment by reference to which expenditure is to be attributed to an asset derived from another asset is set out. The apportionment is to be made by reference to the following factors at the time of disposal —

  • consideration received (a),
  • market value of asset or interest retained (b),

and the fraction of the original expenditure to be deducted in computing the gain on the disposal is —

(a)

(a) + (b)

Thus, shares acquired under a rights issue or as a bonus shares are derived from the original shares, and an apportionment of the cost of the original shares is to be made in the event of a disposal of the rights or shares.

Example

A bought 600 shares costing €600. He becomes entitled to rights to subscribe at €2 a share for one share for every 3 shares he holds. He disposes of his rights for €1 per share and at that time the market value of the shares is €3 each. The cost of the rights is, by apportionment —

€200

€600×

= €60

€200 + €18,000

His gain on the disposal of the rights is therefore €200 less €60, that is, €140. The cost of these shares to the recipient of the rights when he has exercised those rights will be €200 plus the subscription of €2 per share or €400 – total €600. The cost of A’s remaining interest (600 shares) is €600 less €60, that is, €540.

Relevant Date: Finance Act 2021