technical

capital gains
relevant to ACCA Qualification Paper F6 (UK)

capital gains:
in context
This article is relevant to candidates sitting Paper F6 (UK) in either
June or December 2008, and is based on tax legislation as it applies to
EXAMPLE 2
Andy sold a factory on 15 February 2008 for £320,000. The factory
2007–08 (Finance Act 2007). had been purchased on 24 January 1990 for £164,000, and had been
Question 3 of Paper F6 will focus on capital gains in either a extended at a cost of £37,000 during March 2000. During May 2002,
personal or a corporate context. the roof of the factory was replaced at a cost of £24,000 following
a fire.
PERSONAL CAPITAL GAINS Andy incurred legal fees of £3,600 in connection with the purchase
Scope of capital gains tax of the factory, and legal fees of £6,200 in connection with the disposal.
Capital gains tax is charged when there is a chargeable disposal of a The indexation factor from January 1990 to April 1998 is 0.360.
chargeable asset by a chargeable person.
Remember that a chargeable disposal includes part disposals and Andy’s chargeable gain (before taper relief) in respect of the factory is
the gift of assets. All forms of property are chargeable assets unless as follows:
exempted. The most important exempt assets (as far as Paper F6 is £ £
concerned) are certain chattels (see later) and motor cars.
Disposal proceeds 320,000
EXAMPLE 1 Incidental costs of disposal (6,200)
Explain when a person will be treated as resident or ordinarily resident 313,800
in the UK for a particular tax year, and state how a person’s residence Cost 164,000
status establishes whether or not they are liable for capital gains tax: Incidental costs of acquisition 3,600
A person will be resident in the UK during a tax year if they are 167,600
present in the UK for 183 days or more. Enhancement expenditure 37,000
A person will also be treated as resident if they visit the UK regularly, (204,600)
with visits averaging 91 days or more per tax year over a period of 109,200
four or more consecutive tax years. Indexation – 167,600 x 0.360 (60,336)
Ordinary residence is not precisely defined, but a person will 48,864
normally be ordinarily resident in the UK if this is where they
habitually reside. The indexation allowance is calculated on the original cost plus the
A person is liable to capital gains tax on the disposal of assets during incidental costs of acquisition.
any tax year in which they are either resident or ordinarily resident in The factory extension is enhancement expenditure as it has added to
the UK. the value of the factory.
The replacement of the roof is not enhancement expenditure, being
Basic computation in the nature of a repair.
Remember that individuals only receive the indexation allowance up to
April 1998. You will not, however, be expected to calculate indexation Taper relief
factors for individuals. Where relevant, a question will give you either the For disposals after 5 April 1998, taper relief may be available. The relief
indexation factor, the amount of indexation, or the figure given for the is more generous for business assets than for non-business assets. The
cost of an asset will already take account of indexation. percentage of the gain chargeable is as follows:

48  student accountant  May 2008

Complete years after 5 April Percentage of gains chargeable after relief addition of one year to the period for which it is held after 5 April 1998.
1998 for which asset is held Business Non-business Therefore, for disposals of non-business assets during 2007–08, taper
assets assets relief is based on 10 complete years of ownership if the asset was owned
1 50% 100% prior to 17 March 1998. Only 60% of the gain will be chargeable.
2 25% 100% It is obviously important that you know the distinction between a
3 25% 95% business asset and a non-business asset. The most relevant types of
4 25% 90% business asset are as follows:
5 25% 85% assets used for trade purposes by a sole trader
6 25% 80% shares in unquoted trading companies
7 25% 75% shares in quoted trading companies where an individual either has a
8 25% 70% 5% shareholding or is an employee of the company.
9 25% 65%
10 25% 60% EXAMPLE 3
Bia has been in business as a sole trader since 1 May 2000. On 28
A non-business asset acquired before 17 March 1998 qualifies for an February 2008, she sold the following assets:

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Goodwill for £50,000. The goodwill had been built up since 1 May EXAMPLE 4
2000, and had a nil cost. Continuing with Example 3, Bia’s taxable income for the tax year
A freehold office building for £130,000. The office building was 2007–08 is £20,000.
purchased on 1 July 2006 for £110,000, and was always used by
Bia for business purposes. Her capital gains tax liability is as follows:
A freehold warehouse for £140,000. The warehouse was purchased £
on 1 May 2000 for £100,000, and was never used by Bia for 14,600 (34,600 - 20,000) at 20% 2,920
business purposes. 28,700 (43,300 - 14,600) at 40% 11,480
A motor car for £25,000. The motor car was purchased on 14,400
1 November 2002 for £23,500, and was always used by Bia for
business purposes. Bia’s capital gains tax liability will be due on 31 January 2009.

Bia’s taxable gains for the tax year 2007–08 are as follows: Common mistakes
There are a number of common mistakes that you should avoid when
£ Gain Taper Tapered dealing with capital gains tax:
£ % gain Do not treat an unincorporated business as a separate entity for
£ capital gains tax purposes. When a business is disposed of, you
Goodwill should deal with each asset separately.
Disposal proceeds 50,000 Do not forget to deduct the annual exemption.
Cost (Nil) Do not deduct the personal allowance from the figure for taxable
50,000 25% 12,500 income which is usually given if you are expected to calculate the
capital gains tax liability.
Office building Do not use the basic rate of 22% instead of the savings rate
Disposal proceeds 130,000 of 20%.
Cost (110,000)
20,000 50% 10,000 Taper relief and capital losses
Taper relief is computed after deducting any current year capital losses.
Warehouse For this purpose, capital losses are set against capital gains on the most
Disposal proceeds 140,000 beneficial basis. Therefore a capital loss should be set against the capital
Cost (100,000) gains qualifying for the least amount of taper relief.
40,000 75% 30,000
52,500 EXAMPLE 5
Annual exemption (9,200) During the tax year 2007–08, Claude had the following capital gains
43,300 and losses:
A capital gain of £12,000 on a business asset.
Goodwill is a business asset, and taper relief is based on seven A capital gain of £14,000 on a non-business asset.
complete years of ownership. A capital loss of £8,000.
The office building is a business asset, and taper relief is based on
one complete year of ownership. The assets were all owned for two complete years prior to the date of
The warehouse is a non-business asset, and taper relief is based on their disposal.
seven complete years of ownership. £ Gain Taper Tapered
Motor cars are exempt from capital gains tax. £ % gain
£
Rate of capital gains tax Business asset 12,000 25% 3,000
An individual’s capital gains are taxed as if they were savings income, but Non-business asset 14,000
gains are taxed as the top slice of the taxpayer’s income. Therefore, the Capital loss (8,000)
rate of capital gains tax is 10%, 20% or 40% depending on whether the 6,000 100% 6,000
individual pays income tax at the starting rate, the basic rate, or the higher 9,000
rate. Capital gains tax is collected as part of the self‑assessment system,
and is due for payment in one amount on 31 January following the tax The capital loss is set off against the non-business asset since this
year. Payments on account are not required in respect of capital gains tax. does not qualify for taper relief.

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 technical
Married couples Eli Fong – capital gains tax liability 2007–08
Transfers between spouses do not give rise to any gain or loss. The
same treatment applies to transfers between same-sex couples in a £ Gain Taper Tapered
civil partnership. £ % gain
£
EXAMPLE 6 House 45,000 100% 45,000
David and Eli Fong are a married couple. They disposed of the following Ordinary shares in
assets during the tax year 2007–08: Gong Ltd
On 10 June 2007, David and Eli sold a house for £380,000. The Disposal proceeds 70,000
house had been purchased on 1 December 2004 for £290,000, and Cost (48,000)
has never been occupied as their main residence. 22,000 25% 5,500
On 5 August 2007, David transferred his entire shareholding of 50,500
20,000 £1 ordinary shares in Gong Ltd, an unquoted trading Annual exemption (9,200)
company, to Eli. On that date, the shares were valued at £64,000. 41,300
David’s shareholding had been purchased on 21 September 2005 Capital gains tax at 40% 16,520
for £48,000.
On 7 October 2007, Eli sold the 20,000 £1 ordinary shares in Gong David’s original cost is used in calculating the capital gain on the
Ltd that had been transferred to her from David. The sale proceeds disposal of the shares in Gong Ltd.
were £70,000. The shares in Gong Ltd are a business asset, and taper relief is based
on two complete years of ownership. It is the couple’s combined
David and Eli are both 40% taxpayers. period of ownership that is relevant.

Jointly-owned property Part disposals

The chargeable gain on the house is £90,000 (380,000 - 290,000). When only part of an asset is disposed of, the cost must be apportioned
David and Eli will each be assessed on £45,000 (90,000 x 50%) of the between the part disposed of and the part retained.
chargeable gain.
EXAMPLE 7
David Fong – capital gains tax liability 2007–08 On 16 February 2008, Harry sold three acres of land for £285,000.
He had originally purchased four acres of land on 17 July 2006 for
Gain Taper Tapered £220,000. As at 16 February 2008, the market value of the unsold acre
£ % gain of land was £90,000.
£ The cost relating to the three acres of land sold is £167,200
House 45,000 100% 45,000 (220,000 x 285,000/375,000 (285,000 + 90,000)).
Annual exemption (9,200) The chargeable gain on the land is therefore £117,800 (285,000 -
35,800 167,200).
Capital gains tax at 40% 14,320
Chattels
The transfer of the 20,000 £1 ordinary shares in Gong Ltd to Special rules apply to chattels. A chattel is tangible moveable property.
Eli does not give rise to any gain or loss, because it is a transfer
between spouses. EXAMPLE 8
On 18 April 2007, Ivy sold an antique table for £5,600 and an antique
clock for £7,200. The antique table had been purchased on 27 May
2006 for £3,200, and the antique clock had been purchased on 14 June
2006 for £3,700.
The antique table is exempt from capital gains tax because the gross
sale proceeds were less than £6,000.
The gain on the antique clock is restricted to £2,000 (7,200 - 6,000
= 1,200 x 5/3) as this is less than £3,500 (7,200 - 3,700).

Principal private residences

A gain on the disposal of a principal private residence is exempt where

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the owner has occupied the house throughout the whole period of EXAMPLE 10
ownership. The final 36 months of ownership are always treated as a Continuing with Example 9, assume that Jue let her house out during
period of occupation. The following periods of absence are deemed to be those periods when she did not occupy it.
periods of occupation:
Periods up to a total of three years, for any reason. The chargeable gain on the house before taper relief will now be
Any periods where the owner is required to live abroad due to their as follows:
employment. £
Periods up to four years where the owner is required to live elsewhere Disposal proceeds 381,900
in the UK due to their employment. Indexed cost (141,900)
240,000
These deemed periods of occupation must normally be preceded and Principal private residence exemption (207,000)
followed by actual periods of occupation. Letting relief exemption (33,000)
Nil
EXAMPLE 9
On 30 September 2007, Jue sold a house for £381,900. The house had The letting relief exemption is the lowest of:
been purchased on 1 October 1987, and its indexed cost is £141,900. £40,000
Jue occupied the house as her main residence from the date of £207,000 (the amount of the gain exempt under the principal
purchase until 31 March 1991. The house was then unoccupied private residence rules)
between 1 April 1991 and 31 December 1994 due to Jue being required £33,000 (the amount of the non-exempt gain attributable to the
by her employer to work elsewhere in the UK. period of letting (240,000 x 33/240)).
From 1 January 1995 until 31 December 2001, Jue again occupied
the house as her main residence. The house was then unoccupied until it Shares
was sold on 30 September 2007. The disposal of shares can create a particular problem. This is because
The chargeable gain on the house before taper relief is as follows: the shares disposed of might have been purchased at different times,
and it is then difficult to identify exactly which shares have been sold.
£ Because taper relief may be given in respect of disposals made after
Disposal proceeds 381,900 5 April 1998, it is necessary to separately identify purchases made after
Indexed cost (141,900) that date.
240,000 Disposals of shares are matched with purchases in the
Principal private residence exemption (207,000) following order:
33,000 Shares purchased on the same day as the disposal.
Shares purchased within the following 30 days.
The total period of ownership of the house is 240 months (207 + 33), Shares purchased after 5 April 1998 (taking the most recent
of which 207 months qualify for exemption as follows: purchase first on a LIFO basis).
Shares in the 1985 Pool.
Exempt Chargeable
months months The 1985 Pool aggregates all purchases made on or before 5 April 1998.
1 October 1987 to 31 March 1991 (occupied) 42 As far as the exam is concerned, you will simply be given a figure for the
1 April 1991 to 31 December 1994 (working in UK) 45 value of the 1985 Pool as at 5 April 1998.
1 January 1995 to 31 December 2001 (occupied) 84
1 January 2002 to 30 September 2004 EXAMPLE 11
(unoccupied) 33 Kim has had the following transactions in the shares of Long plc:
1 October 2004 to 30 September 2007
(final 36 months) 36 33 1 June 1994 Purchased 3,000 shares for £6,000. The indexed
207 33 value of the 1985 Pool at 5 April 1998 is £6,900.
30 April 2006 Purchased 1,500 shares for £6,750
The exemption is, therefore, £207,000 (240,000 x 207/240). 15 May 2006 Purchased 500 shares for £2,500
15 February 2008 Sold 4,000 shares for £24,000
Letting relief will extend the principal private residence exemption where
a property is let out during a period that does not otherwise qualify The shares in Long plc are not a business asset for the purposes of taper
for exemption. relief. Kim’s capital gain for 2007–08 is as follows:

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£ Gain Taper Tapered EXAMPLE 13
£ % gain Olive made a gift of her entire shareholding of 10,000 £1 ordinary shares
£ in Pink plc to her daughter. On the date of the gift, the shares were quoted
Purchase 15 May 2006 at £5.10–£5.18, with recorded bargains of £5.00, £5.15 and £5.22.
Disposal proceeds The shares in Pink plc are valued at the lower of the quarter up price
(24,000 x 500/4,000) 3,000 (£5.10 + ¼ (£5.18 - £5.10) = £5.12), and at the average of the
Cost (2,500) day’s highest and lowest bargains ((£5.00 + £5.22)/2 = £5.11).
500 100 500 The deemed proceeds figure is therefore £51,100 (10,000 x 5.11).

Purchase 30 April 2006 With a bonus issue, there is no additional cost involved. The only thing
Disposal proceeds that changes is the number of shares held.
(24,000 x 1,500/4,000) 9,000
Cost (6,750) EXAMPLE 14
2,250 100 2,250 On 22 January 2008, Quinn sold 30,000 £1 ordinary shares in Rune
plc for £140,000. Quinn had purchased 40,000 shares in Rune plc on
1985 Pool 9 February 2007 for £96,000. On 3 April 2007, Rune plc made a 1 for
Disposal proceeds 2 bonus issue.
(24,000 x 2,000/4,000) 12,000 £
Cost (6,900 x Disposal proceeds 140,000
2,000/3,000) (4,600) Cost (48,000)
7,400 60 4,440 92,000
7,190
Quinn was issued with 20,000 (40,000 x 1/2) new shares as a
Taper relief is not available in respect of the shares acquired on result of the bonus issue.
30 April 2006 or 15 May 2006 as they were not held for three The cost of the shares sold is therefore £48,000 (96,000 x 30,000/
complete years. (40,000 + 20,000)).
The shares included in the 1985 Pool were owned prior to
17 March 1998, so taper relief is based on 10 complete years With a rights issue the new shares are paid for, and so the cost figure will
of ownership. have to be adjusted.

The reason that disposals are matched with shares purchased within the EXAMPLE 15
following 30 days is to prevent a practice known as bed and breakfasting. On 22 January 2008, Sue sold 30,000 £1 ordinary shares in Tin plc for
A person might sell shares at the close of business one day and then buy £140,000. Sue had purchased 40,000 shares in Tin plc on 
them back at the opening of business the next day. Previously, a gain or 9 February 2004 for £100,000. On 3 May 2006, Tin plc made a 1 for
loss could thus be established without a genuine disposal being made. 2 rights issue. Sue took up her allocation under the rights issue in full,
The 30-day matching rule makes bed and breakfasting much paying £3.00 for each new share issued.
more difficult, since the subsequent purchase cannot take place within £ Gain Taper Tapered
30 days. £ % gain
£
EXAMPLE 12 Disposal proceeds 140,000
Martin purchased 1,000 shares in Nok plc on 5 May 2007 for £10,000. Cost (80,000)
The shares have fallen in value so he would like to establish a capital
loss. Therefore the shares were sold on 2 December 2007 for £2,000, 60,000 95 57,000
and purchased back on 10 December 2007 for £1,900.
Martin’s transactions are caught by the 30-day matching rule. The Sue was issued with 20,000 (40,000 x 1/2) new shares under the
disposal on 2 December 2007 will be matched with the purchase on rights issue at a cost of £60,000 (20,000 x £3.00).
10 December 2007, and so for 2007–08 he will have a capital gain of The cost of the shares sold is therefore £80,000 (100,000 +
£100 (2,000 - 1,900). 60,000 = 160,000 x 30,000/(40,000 + 20,000)).
Taper relief is based on three complete years of ownership. The rights
With individuals, it might be necessary to establish a market value figure issue is treated as an enhancement of the original shareholding. As
where the shares are disposed of by way of a gift, rather than being sold. such, it is ignored for taper relief purposes.

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A paper-for-paper takeover or reorganisation is not a chargeable disposal. Where the disposal proceeds of the old asset are not fully reinvested in
The new shares simply take the place of the original shares, and are the new asset, the amount not reinvested reduces the amount of capital
deemed to have been purchased at the same time and for the same cost. gain that can be rolled over. Therefore, if the amount not reinvested is
If more than one class of new share is acquired as a result of a takeover, greater than the capital gain no rollover relief is available.
the original cost is apportioned according to the market values of the new Where the new asset is a depreciating asset, then the gain does not
shares immediately after the takeover. reduce the cost of the new asset but is instead held over. A depreciating
asset is an asset with a predictable life of less than 60 years. The only
EXAMPLE 16 types of depreciating asset that you need to be aware of are fixed plant
On 28 March 2008, Ula sold her entire holding of £1 ordinary shares and machinery and short leaseholds.
in Vine plc for £55,000. Ula had originally purchased 10,000 shares in
Vine plc on 5 May 2007 for £14,000. On 7 August 2005, Vine plc had EXAMPLE 18
a reorganisation whereby each £1 ordinary share was exchanged for two Willow sold a factory on 15 February 2008 for £320,000, and this
new £1 ordinary shares and one £1 preference share. Immediately after resulted in a capital gain of £85,000. She is considering the following
the reorganisation, each £1 ordinary share in Vine plc was quoted at alternative ways of reinvesting the proceeds from the sale of her factory
£2.50 and each £1 preference share was quoted at £1.25. (note – the reinvestment will take place during May 2008):
A freehold warehouse can be purchased for £340,000.
£ A freehold office building can be purchased for £275,000.
Disposal proceeds 55,000 A leasehold factory on a 40-year lease can be acquired for a
Cost 11,200 premium of £350,000.
43,800
Warehouse
On the reorganisation, Ula received new ordinary shares valued at The sale proceeds are fully reinvested, and so the whole of the gain
£50,000 (2 x 10,000 x £2.50) and preference shares valued at can be rolled over.
£12,500 (10,000 x £1.25). The base cost of the warehouse will be £255,000 (340,000 -
The cost attributable to the ordinary shares is £11,200 (14,000 x 85,000).
50,000/(50,000 + 12,500)
Office building
Rollover relief The sale proceeds are not fully reinvested, and so £45,000
Rollover relief allows a capital gain to be deferred (rolled over) where (320,000 - 275,000) of the capital gain cannot be rolled over.
the disposal proceeds of the old asset are reinvested in a new asset. The The base cost of the office building will be £235,000 (275,000 -
deferral is achieved by deducting the capital gain from the cost of the (85,000 - 45,000)).
new asset.
To qualify for rollover relief, both the old asset and the new asset Factory
must be qualifying assets. The most relevant types of qualifying asset are The sale proceeds are fully reinvested, and so the whole of the gain
as follows: can be held over.
land and buildings The factory is a depreciating asset, and so the base cost of the
fixed plant and machinery factory is not adjusted.
goodwill. The gain is held over until the earlier of May 2018 (10 years from
the date of acquisition) or the date that the factory is sold.
It is not necessary for the old asset and the new asset to be in the same
category. Remember that a claim for rollover relief will mean that any entitlement
to taper relief is lost in respect of the rolled over gain.
EXAMPLE 17 When the new asset is subsequently sold, only the period of
What are the conditions that must be met so that rollover relief can ownership of that new asset counts when deciding how much taper relief
be claimed? is due.
The reinvestment must take place between one year before and three If the asset disposed of was not used entirely for business purposes,
years after the date of disposal. then the gain relating to the non-business proportion does not qualify for
The old and new assets must both be qualifying assets and must be rollover relief.
used for business purposes.
The new asset must be brought into business use at the time that it
is acquired.

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EXAMPLE 19 Yui and her daughter are connected persons, and therefore the
Xia sold a freehold factory on 8 November 2007 for £146,000, and market value of the shares sold is used.
this resulted in a capital gain of £74,000. The factory had been The consideration paid for the shares exceeds the allowable cost
purchased on 15 January 2005. 75% of the factory had been used for by £37,000 (75,000 - 38,000). This amount is immediately
business purposes by Xia as a sole trader, but the other 25% was never chargeable to capital gains tax.
used for business purposes. Xia purchased a new freehold factory on
10 November 2007 for £156,000. Where shares in a personal company are concerned, holdover relief will
£ be restricted if the company has chargeable non-business assets.
Capital gain 74,000
Rollover relief (74,000 - 18,500) (55,500) EXAMPLE 21
18,500 On 5 October 2007, Apple made a gift of her entire holding of 20,000
£1 ordinary shares (a 100% holding) in Black Ltd, an unquoted trading
The proportion of the gain relating to non-business use is £18,500 company, to her daughter. The market value of the shares on that date
(74,000 x 25%), and this amount does not qualify for rollover relief. was £200,000. The shares had been purchased on 1 January 2007
As the sale proceeds are fully reinvested, the balance of the gain can for £140,000. On 5 October 2007, the market value of Black Ltd’s
be rolled over. chargeable assets was £150,000, of which £120,000 was in respect of
The base cost of the new factory is £100,500 (156,000 - 55,500). chargeable business assets. Apple and her daughter have elected to hold
The figure chargeable relates to a non-business asset. Taper relief is over the gain as a gift of a business asset.
not available as the factory has been owned for less than three years. £
Deemed proceeds 200,000
Holdover relief Cost (140,000)
Holdover relief allows a capital gain to be deferred (held over) when a 60,000
gift is made of a qualifying business asset. The deferral is achieved by Gift relief (48,000)
deducting the capital gain of the donor who has made the gift from the 12,000
base cost of the donee who has received the gift.
Holdover relief is also available when a sale is made at less than Gift relief is restricted to £48,000 (60,000 x 120,000/150,000),
market value. In this case, there will be an immediate charge to capital being the proportion of chargeable assets to chargeable business
gains tax where sale proceeds exceed the original cost of the asset. assets.
The most relevant types of qualifying business asset are as follows:
Assets used for trade purposes by a sole trader. A claim for holdover relief will mean that the donor loses any entitlement
Shares in a personal company (where the individual has at least a to taper relief in respect of the held over gain. When the donee
5% shareholding). subsequently sells the asset, only their period of ownership counts in
Shares in unquoted trading companies. deciding how much taper relief is due.

Remember, when a gift is made between family members, the market The transfer of a business to a limited company
value of an asset is used rather than the actual proceeds as family Rollover relief is available when an unincorporated business is
members are connected persons. incorporated. For relief to be available, all the assets of the unincorporated
business must be transferred to the new limited company in exchange for a
EXAMPLE 20 consideration that must be wholly or partly in the form of shares.
On 15 April 2007, Yui sold 10,000 £1 ordinary shares (a 30% The deferral is achieved by deducting the capital gains arising on the
shareholding) in Zone Ltd, an unquoted trading company, to her daughter disposal of the assets of the unincorporated business from the value of
for £75,000. The market value of the shares on that date was £110,000. the shares received from the new limited company.
The shareholding was purchased on 10 July 2006 for £38,000. Yui and Where some of the consideration is in the form of cash or a loan,
her daughter have elected to hold over the gain as a gift of a business asset. then that proportion of the capital gains cannot be rolled over.

£ EXAMPLE 22
Deemed proceeds 110,000 On 8 April 2007, Chloe incorporated a wholesale business that she
Cost (38,000) had run as a sole trader since 1 March 2005. The market value of the
72,000 business on 8 April 2007 was £250,000. All of the business assets
Gift relief (72,000 - 37,000) (35,000) were transferred to a new limited company, with the consideration
37,000 consisting of 200,000 £1 ordinary shares valued at £200,000, and

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£50,000 in cash. The only chargeable asset of the business was The indexation allowance is given up to the date of disposal when
goodwill, and this was valued at £100,000 on 8 April 2007. The calculating capital gains for a limited company. Taper relief is not
goodwill had a nil cost. available to limited companies.
Limited companies can only benefit from rollover relief. They
£ Gain Taper Tapered cannot benefit from holdover relief for the gift of business
£ % gain assets, or from rollover relief upon incorporation. For companies,
£ remember that rollover relief is applied after taking account of
Disposal proceeds 100,000 indexation allowance.
Cost (Nil)
100,000 Basic computation
The basic computation for a limited company is virtually the same as
Rollover relief for an individual. However, as you may be expected to calculate the
(100,000 - 20,000) (80,000) indexation allowance, remember the following:
20,000 25% 5,000 Limited companies receive the indexation allowance up to the month
of disposal.
As the proportion of the gain relating to the cash consideration The indexation factor is normally rounded to three decimal places.
cannot be rolled over, £20,000 (100,000 x 50,000/250,000) of the The indexation allowance cannot be used to create or increase a
capital gain is immediately chargeable to capital gains tax. capital loss.
Taper relief is based on two complete years of ownership.
EXAMPLE 24
A claim for rollover relief on incorporation will mean that any entitlement Even Ltd sold a factory on 15 February 2008 for £320,000. The factory
to taper relief is lost in respect of the gain rolled over. When the new had been purchased on 24 October 1995 for £164,000, and had been
shares are subsequently sold, only their period of ownership counts in extended at a cost of £37,000 during March 1997.
deciding how much taper relief is due. Even Ltd incurred legal fees of £3,600 in connection with the
purchase of the factory, and legal fees of £6,200 in connection with the
The loss or destruction of an asset disposal. Retail price indices (RPIs) are as follows:
If an asset is lost or destroyed then the receipt of insurance monies is
treated as a normal disposal. However, rollover relief is available if the October 1995 149.8
insurance monies are used to purchase a replacement asset within a March 1997 155.4
period of 12 months. February 2008 208.0

EXAMPLE 23 £ £
On 20 May 2007, an antique table owned by Dwight was destroyed in Disposal proceeds 320,000
a fire. The antique table had been purchased on 23 November 2006 for Incidental costs of disposal (6,200)
£50,000. Dwight received insurance proceeds of £74,000 on 6 August 313,800
2007, and on 18 August 2007 he paid £75,400 for a replacement Cost 164,000
antique table. Incidental costs of acquisition 3,600
The insurance proceeds of £74,000 received by Dwight have been 167,600
fully reinvested in a replacement antique table. Enhancement expenditure 37,000
The disposal is therefore on a ‘no gain no loss’ basis, with the capital (204,600)
gain of £24,000 (insurance proceeds of £74,000 less original 109,200
cost of £50,000) being set against the cost of the replacement Indexation – Cost 167,600 x 0.389 65,196
antique table. – Enhancement 37,000
x 0.338 12,506
CORPORATE CAPITAL GAINS (77,702)
Overview 31,498
You have seen how individuals are subject to capital gains tax. Although
there are a lot of similarities in the way in which the capital gains The indexation factor for the cost is 0.389 (208.0 - 149.8)/149.8,
of a limited company are taxed, there are also some very important and for the enhancement expenditure it is 0.338 (208.0 -
differences, namely: 155.4)/155.4.
A limited company’s capital gains form part of the profits chargeable
to corporation tax. They are not taxed separately. When a limited company has a capital loss, it is first set off against
The annual exemption is not available. any capital gains arising in the same accounting period. Any remaining

56  student accountant  May 2008

 technical
capital loss is then carried forward and set off against the first available Capital gains tax is charged when there is a
capital gains of future accounting periods.
Although capital gains are included as part of a company’s profits chargeable disposal of a chargeable asset by
chargeable to corporation tax, capital losses are never set off against a chargeable person. There is a lot to learn and the
other income.
differences in the treatment of limited companies
EXAMPLE 25 and individuals do not make this task any easier.
Fine Ltd has the following results: It is important that you know how to lay out a
Year ended Year ended basic computation for both an individual and a
31 March 2007 31 March 2008 limited company, calculate taper relief, and apply
£ £
Trading profit/(loss) 56,000 (17,000)
the three different reliefs that are available.
Property business income 4,000 10,000
Capital gain/(loss) (8,000) 85,000
June 1995 149.8
The corporation tax liability of Fine Ltd for the years ended 31 March August 1999 165.5
2007 and 2008 is as follows: June 2007 205.0

Year ended Year ended Capital gain

31 March 2007 31 March 2008 £
£ £ Disposal proceeds 275,000
Trading profit 56,000 - Cost (203,000)
Property business income 4,000 10,000 72,000
Capital gain - 77,000 Indexation (261,446 - 203,000) (58,446)
60,000 87,000 13,554
Loss relief - (17,000)
Profits chargeable to corporation tax 60,000 70,000 1985 Pool
Number Cost Indexed
Corporation tax at 19% 11,400 £ cost
Corporation tax at 20% - 14,000 £
Purchase June 1995 40,000 110,000 110,000
The capital loss for the year ended 31 March 2007 is carried Indexation to August 1999
forward, and so the capital gain for the year ended 31 March 2008 110,000 x (165.5 - 149.8)/149.8 11,529
is £77,000 (85,000 - 8,000). 121,529
Purchase August 1999 60,000 180,000 180,000
Shares 100,000 290,000 301,529
For limited companies, disposals of shares are matched with purchases Indexation to June 2007
in the following order: 301,529 x (205.0 - 165.5)/165.5 71,966
Shares purchased on the same day as the disposal. 373,495
Shares purchased during the nine days prior to the disposal. Disposal June 2007
Shares in the 1985 Pool. Cost x 70,000/100,000 (70,000) (203,000) (261,446)
Balance carried forward 30,000 87,000 112,049
When calculating indexation allowances for the 1985 Pool, the
indexation fraction is not rounded to three decimal places. CONCLUSION
There is quite a lot to learn with regards to capital gains, and the
EXAMPLE 26 differences in the treatment of limited companies and individuals do not
On 15 June 2007, Gong Ltd sold 70,000 £1 ordinary shares in Heavy make this task any easier. It is particularly important that you know how
plc for £275,000. Gong Ltd had originally purchased 40,000 shares to do the following: lay out a basic computation for both an individual
in Heavy plc on 10 June 1995 for £110,000, and purchased a further and a limited company; calculate taper relief; and apply the three
60,000 shares on 20 August 1999 for £180,000. different reliefs that are available.

Retail price indices (RPIs) are as follows: David Harrowven is examiner for Paper F6 (UK)

  May 2008  student accountant  57