Chargeable Gains for
Companies
Week 6
Introduction
• Chargeable gains
– Its important to note that companies pay CT on chargeable gains
and not CGT as individuals
– Therefore the Chargeable gains are included in the accounting
periods taxable total profits
– The Calculation is the same as that for individuals the only
difference is that companies get indexation allowance: treatment
of capital losses, share and securities available reliefs are also
different and discussed let
• Pro forma
Disposal proceeds
Less incidental disposal cost
net Proceeds
Less: Allowable expenditure
Un-indexed gain
Less indexation allowance
Chargeable gain/[allowable loss]
£
X
(X)
X
(X)
X
(X)
X
Indexation Allowance
• Indexation Allowance [IA] gives companies an
allowance for the effect of inflation in calculating
a gain [to reflect the true increase in capital
value in real time]
• Rules
– IA is based on the cost of the asset and the
movement in the retail price index
– It is available from the month of purchase to the
month of disposal
– IA is calculated for each asset.
– IA CAN NOT create or increase a loss
– If there a fall in the RPI between the month of
purchase and the month of diposal, the IA is zero
• Calculation of IA
– IA = [Indexation factor X Allowable cost]
– Indexation Factor [rounded to 3 decimal places]
RPI in the month of disposal- RPI in the month of purchase
RPI in the month of purchase
• Example
Kane Ltd sold a chargeable asset in June 2010, which it
had bought in February 1987.
The RPI:
February 1987 100.4
June 2010
224.4
Calculate the indexation factor to be used.
Capital Losses
• A loss occurs where the proceed from a
sale are less than allowable expenditure
• Loss Utilisation:
– First set off against chargeable gains arising
in the same a/cing period.
– Un relieved losses are carried forward to be
set against future Chargeable gains: asap
– Capital losses can not be set off against any
other income of a company.
Shares and Securities
• First there is a need to march acquisition with disposal
• Marching Rules
– Disposals are matched against acquisitions as follows:
• Shares bought on the same day [disposal day]
• Shares acquired with the nine days before the sale
• Shares in the share pool [1985 pool]
• Calculation of gains on same day and previous 9 days
purchases
– There is no IA on these share even if the date straddle a month
Sale proceeds
Less Allowable Cost
Chargeable gain
£
X
(X)
X
• Pool
– It contains company shares of the same class.
– The pools will have a record
• Number of shares acquired and disposed
• Cost of the shares
• Indexation cost of the shares (cost + IA)
– The recording of the indexation cost must be
updated before recording the “operative
Event” for pooled shares.
– The indexation factor is not rounded to three
decimals places when calculation IA for
pooled shares
– On sale of pool shares, calculate the cost and
indexed cost that relate to the shares.
• Pro forma for Company’s share pool
No.
Purchases
IA to next operative event
Purchase
IA to next operate event
Disposal
Pool carried Forward
X
X
(X)
X
Cost.
£
Indexed cost
£
X
X
X
X
X
(X) (W2)
X
X
X
(X) (W1)
X
Notes Page 625
(W1) Calculate the average pool cost of the shares disposed of
(W2) Calculate the average indexed cost of the shares disposed of
Working 1& 2 feeds into a normal gain computation as follows
Sales proceeds
Less Cost (W1)
Un-indexed gain
Less indexation Allowance (W2-W1)
Chargeable gain
£
X
(X)
X
(X)
X
• Bonus and rights Issues
– Free shares based on existing shareholding
– Rights: shareholder buy share in proportion to their
holding below the market rate
– They are both regarded as new acquisitions but for
matching purpose they are not treated as separate
holdings
– Bonus Issues
• Free shares and no indexation
• They are not an operative event in the share pool
• Therefore just add them to the pool, then the next indexation
event happens, this will be indexed from the operative event
before the date of the bonus issue
– Rights Issue
• This is an operative event therefore index up to the date of
the rights issue; then add to the number of shares and their
cost.
Takeovers/reorganisations
• Consider: shares for shares
– Where the consideration is only share issues the tax
consequences are
• No gain arises at the time of the reorganisation or takeover
• The cost of the original shares becomes the cost of the new
shares
• Where more than one type of shares are given as
consideration
– The cost of the original shares is allocated to the new shares
– By reference on the mkt. value of the various new share
– On the first day of dealing in them
– Where they is a mixed consideration
• Where cash and shares are received, there is a part disposal
of the original shares
• A chargeable gain arises on the cash element of the
consideration
Reliefs Available to Co.
• The only relief for Co’s. is roll over relief.
• It is allows companies to replaces assets that they use in
their trade without incurring Corporation tax liability on the
related chargeable gains.
• The gain arising on the disposal of the asset is deducted
from (roll over against) cost of the new asset
• All the proceeds have to be reinvested for this relief to be
claimed
• Assets that are usually examined are;
– Land and building that is occupied and used for trading purposes
– Fixed plant and machinery
• The replacement must be
– A year before the sale of the old assets and
– End of three years after the sale
• Where only part of the proceeds are reinvested, the
surplus retained reduces the amount of the chargeable
gain that can be rolled over
• Where the asset has had private use,the relief is
proportioned to reflect non business use
• If the reinvestment is in a depreciating asset, the
CG is deferred until the earliest of:
– Disposal of the depreciating asset
– Asset ceases to be used for the trading purpose
– 10 years from the date of purchase
• A depreciating asset is one that does not have a
predictable life of more than 60 years
• Good will does not qualify for roll over relief