Paper 2.3 – Business Taxation FA 2003
By Ahmed Alasalli
Chargeable Gains
Chargeable gains arise on chargeable disposals of chargeable assets by companies.
Chargeable disposals may occur through a sale of a chargeable asset, or even destruction, unless if it was
inherited (where an individual rather than company is concerned).
All capital assets are basically chargeable, except for motor vehicles, debts or trading stock.
The government aims to tax those chargeable gains depending on certain criteria, where the following
calculations are used:
Sales
Less:
(Incidental Cost)
(Acquisition Cost)
(Subsequent Cost)
(Indexation Allowance)
The sales figure refers to the actual sales proceeds on disposal, but whenever there is an exchange or a gift,
sales = market value. Where an asset is damaged, or destroyed, sales = insurance claim or scrap.
Furthermore, assets held as capital, but then sold for trade proceeds is also a capital gain.
Incidental Costs are those required to acquire the asset or dispose of it, although this may also be an
allowable deduction in arriving to the D Case 1 profit figure. These include:



Cost of professional services
Advertising costs to find a buyer or seller
Conveyance or transfer costs
Acquisition cost is the purchase cost of the asset. Basically, the price paid when the asset was originally
purchased
Subsequent costs refer to any (A) expenditure on enhancing the value of the asset, or (B) expenditure
incurred to establish, preserve or defend the company’s title to the asset, which are very rare, since most of
these will be under D Case 1. Nevertheless, subsequent costs must:


have purpose of enhancing the asset’s value
and be reflected in the state or nature of the asset at the time of disposal
The indexation allowance aims to ensure that capital gains are taxed on the increase in real terms of an
asset’s value. For this purpose inflation is measured via the Retail Prices Index (RPI).
(RPI in month of disposal – RPI in month of expenditure) / RPI in month of expenditure



the fraction is rounded to three decimal places before being used in the capital gains computation
the indexation factor is applied to each element of allowable expenditure other than the incidental costs
of disposal
indexation is only available to extinguish a capital gain, it is not available to create or increase a capital
loss
Rollover Relief
Rollover relief exists to allow companies to replace assets used in their trade wihtout incurring a
corporation tax liability on the related chargeable gains.
Assets which qualify for rollover relief:



land and buildings that are both occupied and used for trading purposes
fixed plant and machinery (in this context ‘fixed’ means immovable)
goodwill
The acquisition of the replacement asset must occur during a period that begins one year before the sale of
the old asset and ends three years after the sale.
Where disposal proceeds of the old asset are not fully reinvested, the surplus retained reduces the amount
of capital gain that can be rolled over. In other words, proceeds not reinvested are immediately chargeable
to corporation tax.
Example 1
Suppose Land A, initially purchased for ₤200,000, was sold for ₤1,000,000, and thus incurring incidental
costs of ₤400,000. If ₤900,000 were used to purchase land B, what’s Land B’s new Base Cost?
Purchase cost of Land B
Disposal proceeds of Land A
Cost of Land A
Incidental Costs
Indexation Allowance (assume 0)
Capital Gain
900,000
1,000,000
(200,000)
800,000
(400,000)
(0)
400,000
Proceeds Not Reinvested (1,000,000 – 900,000)
Base Cost of New Factory
(400,000)
500,000
(100,000)
400,000
When an asset has not been used entirely for business purposes throughout the company’s period of
ownership, the rollover relief is scaled down in porportion to the non-business use.
Example 2
The company purchased a factory I Noveember 1989 for ₤335,000. Not needing all the space, Hadley Ltd
let out 15% of it. In August 2003 the company sold the factory for ₤560,000 and bought another in October
2003 for ₤600,000, claiming rollover relief.
The indexation allowance from November 1989 to August 2003 should be taken as ₤180,000.
a) What is the gain remaining chargeable on the disposal in August 2003?
b) What is the base cost of the new factory?
Disposal proceeds
Cost
Indexation Allowance
Capital Gain
560,000
(335,000)
225,000
(180,000)
45,000
Purchase Cost of New Factory
Less: Capital Gain on old Factory used for Trading Purposes (85%)
Base cost of new factory
600,000
(38,250)
561,750
The non-qualifying part of the capital gain is ₤6,750. This is included in the profits chargeable to
corporation tax for the year ended 31 March 2004, as it does not qualify for rollever relief.
Reinvestment in depreciating assets
Any asset with a predictable life of not more than 60 years is a depreciating asset. In this case rollover relief
is modified to ensure that any gain accrued on the old asset does not escape corporation tax because the
new one loses value over a short life. As far as the examinations are concerned, the only types of asset that
will be depreciating assets are fixed plant and machinery and short leases (life of 50 years or less).
In this case, capital gain is deferred until the earliest of:



disposal
ceases to be used for trading purposes
10 years since asset was acquired
At this time the capital gain on the old asset becomes chargeable to corporation tax. As with rollover relief,
if only parts of the proceeds are reinvested, or the asset was not wholly used for the trade, an element of the
capital gain becomes chargeable to corporation tax immediately.
Example 3
Cooper Ltd. makes up its accounts to 31 March.
The company purchased a freehold factory in June 1986 for ₤250,000 (indexed to May 2001.) In May
2001, Cooper Ltd. sold the factory for ₤320,000 and in June 2001 bought fixed plant and machinery for
₤450,000 (this figure indexed to March 2004). In March 2004 Cooper Ltd sold the fixed plant and
machinery for ₤475,000.
Calculate the chargeable gains arising in the year ended 31 March 2004 assuming Cooper Ltd claims to
defer gains where possible.
a) Freehold Factory
Disposal Proceeds
Purchase Cost of Old Factory
Capital Gain
320,000
(250,000)
70,000
b) Plant and machinery
Disposal proceeds
Purchase Cost of Plant and Machinery
Capital Gain
475,000
(450,000)
25,000
Acquisition of a new non-depreciating asset
The held over capital gain normally becomes chargeable after 10 years, when the depreciating asset is sold
or when it ceases to be used in the trade, whichever is the earliest. If, before this happens, a new nondepreciating asset is acquired rollover relief can be reinstated the capital gain on the original asset is then
rolled over into the new non-depreciating asset and the depreciating asset is, effectively, ignored. One can
think of the impact of the depreciating asset as simply giving a company an extended period for
reinvestment.
Example 4
Smith Ltd purchased a factory in February 1989 for ₤205,000 (indexed to May 2001).
In May 2001 the company sold the factory for ₤280,000 and acquired fixed plant and machinery with a life
of less than 60 years in June 2001 for ₤385,000 (indexed to December 2003). The fixed plant and
machinery is a chargeable asset for capital gains purposes.
Smith Ltd sold the fixed plant and machinery for ₤430,000 in December 2003, and purchased a new factory
in April 2003 for ₤390,000 (indexed to March 2004)
In March 2004 the company sold the second factory for ₤425,000. Calculate the chargeable gain on:
a) the disposal of the first factory
b) the disposal of the fixed plant and machinery, and
c) the disposal of the second factory
Chargeable gain on first factory – May 2001
Disposal proceeds
Purchase Cost
Gain available for hold over relief

280,000
(205,000)
75,000
this is so because the proceeds were reinvested in a depreciating asset.
Chargeable gain on fixed plant and machinery
Disposal proceeds
Indexed Cost
Chargeable Gain
430,000
(385,000)
45,000
Chargeable gain on the second factory
Disposal proceeds
Indexed Cost
Rolled over Gain
425,000
390,000
(75,000)
(315,000)
Chargeable Gain

110,000
Since Smith Ltd purchased another non-depreciating asset (the second factory) before the depreciating
asset was sold. It could therefore rollover the gain on the first factory into the second.