ACCA F6 FA09 Study Text 2010

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Paper F6 (UK)

Taxation FA2009

CHAPTER

Chargeable gains

of a company

Contents

1 Overview of the taxation of chargeable gains of a

company

2 Disposal of chargeable assets other than shares

and securities

3 Rollover relief

4 Disposal of shares and securities

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Overview of the taxation of chargeable gains of a company

 The basic charging rules

 Calculating the net chargeable gains of a company

1 Overview of the taxation of chargeable gains of a

company

1.1 The basic charging rules

A chargeable gain arises if a chargeable person (for example, a company) makes a

chargeable disposal of a chargeable asset.

 A chargeable disposal is the sale or gift of the whole or part of an asset.

 A chargeable asset is any capital asset (tangible or intangible) except those

specifically exempted from tax.

Exempt assets

Exempt assets for companies are the same as for individuals, but with one

exception. Goodwill is an exempt asset in the hands of a company as it is dealt with

under the intangible asset rules.

Liability to corporation tax for net chargeable gains

A company is liable to corporation tax on its total net chargeable gains in the CAP.

A chargeable gain or allowable loss is brought into a CAP according to the date of

disposal (i.e. the date of sale of the asset). In other words, chargeable gains or

allowable losses apply to the CAP in which the disposal occurs.

Note that, unlike individuals, companies do not receive an annual exemption.

1.2 Calculating net chargeable gains of a company

There are three steps in the calculation of the net chargeable gains of a company:

Step 1: Calculate the gains or losses arising on the chargeable disposals

A separate gain or loss calculation is needed for each individual chargeable asset

that is disposed of in the CAP.

Step 2: Calculate and deduct any rollover relief, if applicable

Relief is available to defer the tax on some gains if certain conditions are satisfied.

Rollover relief is explained later.

Chapter 18: Chargeable gains of a company

Step 3: Calculate the net chargeable gain to include in the PCTCT statement

Net chargeable gains are included in the PCTCT statement. The net chargeable gain

is calculated as follows:

Total chargeable gains arising on individual disposals in the CAP X

Minus Allowable losses arising on disposals in the CAP

(X)

Allowable losses brought forward from previous CAPs (X)

Net chargeable gains X

If allowable losses exceed chargeable gains

Where allowable losses exceed the chargeable gains in the CAP, the following rules

apply:

 The net chargeable gain in the PCTCT statement is £0.

(It is not permitted to have a negative chargeable gain in a corporation tax

computation. Capital losses cannot be set off against the company’s other

income in the CAP.)

 Excess allowable losses can be carried forward to future CAPs, but cannot be

carried back to previous CAPs.

 Excess allowable losses must be set off against the first available net chargeable

gains in future CAPs.

There is no choice in treatment. If a current period set off is possible, a company

cannot choose to skip a CAP and wait to set off losses against a future period.

Example

A company had allowable losses in excess of its chargeable gains for its CAP to 31

December 2009.

 It cannot set these losses against any other taxable income for the year.

 It must carry the excess allowable loss forward to set off against chargeable gains

in future CAPs. It cannot carry the losses back and set them against chargeable

gains for the year to 31 December 2008.

 It must set off the excess allowable loss against the first available chargeable

gains in future CAPs. For example, if there are sufficient chargeable gains for the

year to 31 December 2010, it must set off the excess allowable loss against these

gains, and cannot carry the loss forward to set off against the chargeable gains

for the year to 31 December 2011 (or a later year).

Capital losses can only be set off against future net chargeable gains. They can not

be set off against the company’s other income in future CAPs.

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Disposal of chargeable assets other than shares and securities

 Overview of a chargeable gain computation

 Incidental costs

 The indexation allowance

2 Disposal of chargeable assets other than shares and

securities

2.1 Overview of a chargeable gain computation

The first step in calculating the net chargeable gain of a company is the calculation

of separate chargeable gains and allowable losses on every chargeable asset

disposed of in the CAP.

The computation for a company differs slightly from the computation for an

individual as it includes an allowance for inflation, known as the indexation

allowance.

The chargeable gain computation is as follows:

Gross sale proceeds X

Minus Incidental costs of sale (X)

Net sale proceeds X

Minus Allowable costs

Acquisition cost (including incidental costs) (X)

Enhancement expenditure (X)

Unindexed gain/(loss) X/(X)

Minus Indexation allowance (IA) (see 2.3 below)

eexpenditurofmonthforRPI

eexpendituro

mont

forRPI‐disposalo

mont

forRPI

Cost ×

(X)

Chargeable gain/(allowable loss) before rollover relief X/(X)

Minus Rollover relief (if applicable) (X)

Chargeable gain/(allowable loss) X/(X)

2.2 Incidental costs

When calculating the chargeable gain for a company, it is important to keep

incidental selling costs separate from acquisition costs because indexation

allowance:

 is available on incidental acquisition costs, but

Chapter 18: Chargeable gains of a company

 is not available on incidental selling costs.

2.3 The indexation allowance

The indexation allowance (IA) eliminates any inflationary gains. As a result, a

company is only taxed on the real growth in value of any capital assets it disposes

of.

The IA is based on the movement in the retail prices index (RPI). It is given from the

date the expenditure is incurred to the date of disposal and is calculated separately

for each element of allowable expenditure.

The indexation allowance is calculated as follows:

IA = Cost × Indexation factor

eexpenditurofmonthforRPI

eexpenditurofmonthforRPI‐disposalofmonthforRPI

=Factor

Examples in this text use the appropriate RPIs shown in the Tax Rates and

Allowances pages.

In the examination, the appropriate RPIs (if required for an answer) will be given in

the question, not as part of the tax rates and allowances information sheet.

However, some past examination questions have provided the relevant information

in other ways:

 by giving the indexation factor to be used, or

 by giving the indexation allowance as a monetary amount, or

 by stating that the cost given in the question is the indexed cost (i.e. it already

includes indexation allowance).

If the IA needs to be calculated, the tax legislation states that the indexation factor

must be rounded to three decimal places before multiplying by the allowable cost.

If there is enhancement expenditure, a separate IA calculation is needed, based on

the RPI from the month of enhancement to the month of disposal.

The IA cannot create nor increase an allowable loss. At best, the IA brings the gain

down to £Nil.

Example

G Ltd purchased an investment property in June 1990 for £42,000. Estate agents’ and

solicitors’ fees totalled £2,500. In August 2000 an extension costing £36,000 was

added, and the whole property was redecorated at a cost of £5,500.

G Ltd sold the property on 25 June 2009. The estate agents’ and solicitors’ fees were

arranged at a fixed price and totalled £4,800.

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Required

Calculate the chargeable gain/(allowable loss) assuming the property is sold for

each of the following alternative amounts:

(a) £150,000

(b) £110,000

RPI

June 1990: 126.7

August 2000: 170.5

June 2009: 213.4

Answer

(a) (b) (c)

£ £ £

Gross sale proceeds (June 2009) 150,000 110,000 70,000

Minus Incidental selling expenses (4,800) (4,800) (4,800)

–

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–

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–

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–

Net sale proceeds 145,200 105,200 65,200

Original cost (June 1990)

(including incidental acquisition costs)

(44,500)

Cost of extension (August 2000) (36,000) (36,000) (36,000)

–

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–

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–

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–––––––––––––––––––––––––––––––––

–

Unindexed gain / (loss)

64,700 24,700 (15,300)

IA on original cost

From June 1990 to June 2009

£44,5000.684=

7.1264.213

−

7126

(30,438) (24,700) 0

IA on extension

restricted

From August 2000 to June 2009

£36,0000.252=

5.1704.213

−

5170

(9,072) 0 0

–

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–

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–

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–

Chargeable gain / (Allowable loss)

25,190 0 (15,300)

–

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–

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–

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–

Notes

(1) Redecoration costs are not capital expenditure and are therefore not allowable

in the capital gain computation.

(2) Indexation allowance can not create or increase a loss. In scenario (b) the IA is

restricted to the amount where the net chargeable gain is £0. In scenario (c) no

IA is available as a loss arises before the application of indexation.

Chapter 18: Chargeable gains of a company

Rollover relief

 Overview of rollover relief

 Qualifying business assets

 Non-business use

3 Rollover relief

3.1 Overview of rollover relief

Rollover relief is the only capital gains relief available to companies. It allows the

deferral of the indexed gains arising on the disposal of qualifying business assets

(QBAs).

3.2 Qualifying business assets

The definition of a qualifying business asset is the same as discussed earlier in

relation to individuals, but with one exception. Goodwill is not a qualifying asset if

disposed of by a company

Example

H Ltd prepares its accounts to 31 March each year. On 31 December 2009 it sold a

freehold warehouse for £450,000, which gave rise to a chargeable gain (before

considering reliefs) of £123,350.

On 24 February 2010 H Ltd purchased a 99-year lease on a new warehouse. It is

anticipated that that the leasehold warehouse will be sold in September 2014 for

£750,000.

Required

(a) Calculate the chargeable gain arising in the year ended 31 March 2010,

assuming the lease was purchased for each of the following alternative

amounts:

(i) £480,000

(ii) £418,000

(iii) £320,000

For each scenario, calculate the unindexed gain that is anticipated to arise in

the year ending 31 March 2015.

(b) Explain the difference in treatment if the replacement warehouse were a 55

year leasehold interest.

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Answer

Part (a)

Is the asset a QBA for rollover relief purposes? Yes

Has it been replaced with a QBA? Yes

Has it been replaced in the four-year qualifying period?

(31 December 2008 – 31 December 2012)

Yes

(i) (ii) (iii)

£ £ £

Sale proceeds received 450,000 450,000 450,000

Cost of replacement 480,000 418,000 320,000

Sales proceeds not reinvested - 32,000 130,000

Have all the sale proceeds been reinvested in a QBA? Yes No No

(i) (ii) (iii)

Chargeable gain arising in y/e 31 March 2010

Lower of

(1) All the gain

123,350

(2) The sale proceeds not reinvested in QBAs 0 32,000

Rollover relief = the rest of the gain

£123,350 / (£123,350 – £32,000) / £0 123,350 91,350 Nil

–

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–

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–

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–

Base cost of replacement 99-year leasehold interest

Cost 480,000 418,000 320,000

Minus: Rollover relief (123,350)

(91,350) (Nil)

–

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–

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–

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–––––––––––––––––––––––––––––––––

–

Base cost 356,650 326,650 320,000

–

–––––

–

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–

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–

Unindexed gain arising in y/e 31 March 2015

Sale proceeds 750,000 750,000 750,000

Base cost (356,650)

(326,650) (320,000)

–

–––––

–

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–

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–––––––––––––––––––––––––––––––––

–

Unindexed gain 393,350 423,350 430,000

–

–––––

–

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–

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–

Part (b): If the replacement had been in a 55-year leasehold interest

 A 55-year leasehold interest is a QBA, but is a depreciating asset.

 The calculation of the amount of rollover relief and the chargeable gain arising in

the year ended 31 March 2010 would be the same as above for each scenario.

 However, the amount relieved with a rollover relief claim is not deducted from

the cost of the replacement asset.

 A record of the amount of rollover relief is kept and that amount is deferred for

a maximum of 10 years from the date of acquisition of the replacement

warehouse. However, as the replacement asset is disposed of before 10 years

have elapsed, the deferred gain becomes chargeable in y/e 31 March 2015 on the

disposal of the replacement asset.

Chapter 18: Chargeable gains of a company

 In addition to the deferred gain on the original asset becoming chargeable, an

unindexed gain of £430,000 arises on the disposal of the replacement asset itself.

This is calculated in the normal way, using the actual cost of the leasehold

interest with no rollover relief deduction (i.e. as in scenario (iii) above).

Paper F6 (UK): Taxation FA2009

Disposal of shares and securities

 Overview of the gain computation for shares and securities

 The share identification rules

 The share pool

 Proforma: share pool for companies

 The chargeable gain on the disposal of shares from the pool

 Bonus issues

 Rights issues

 Takeovers

4 Disposal of shares and securities

4.1 Overview of the gain computation for shares and securities

If a company buys shares in another company and then sells them all at a later date:

 the chargeable gain computation is the same as for assets other than shares

except that the indexation factor is not rounded to three decimal places, and

 rollover relief is not available.

However, if a company buys shares in another company over a period of time in a

series of transactions, and then disposes of some, but not all the shares, the

calculations of chargeable gains are more complex. In this situation:

 it is necessary first of all to identify which shares have been sold, before

 the appropriate gain can be calculated.

4.2 The share identification rules

When purchasing shares, a company must keep separate records for each different

type and class of shares that it has purchased. For example, records for purchases of

X Ltd ordinary shares are kept separate from the purchase records for Y Ltd

ordinary shares, which are kept separate from Y Ltd preference share purchase

records.

Share identification rules are applied to identify which of the shares have been

disposed of. (These are also known as matching rules). These rules are different to

the identification rules that apply to disposals made by individuals.

In the examination, shares are deemed to be disposed of in the following order:

(1) Acquisitions on the same day as the disposal

(2) Acquisitions in the previous nine days on a last-in-first-out basis

(3) Shares in the pool.