Making Allowances for Capital Gains

The sale of assets/property by a company is a deceptively complex area, and there are a number of issues and reliefs that must be considered to ensure that the corporation tax payable on the capital gain is correct.

Sale of Asset – General Deductions

In determining the capital gain on the disposal of an asset (most commonly property), a deduction can be made in respect of the following:

• Base cost/Acquisition cost;
• Incidental costs of acquisition and disposal, e.g. professional fees, advertising costs, and valuations;
• Costs incurred that increase the capital value of an asset (known as “Enhancement Expenditure”), e.g. costs of building an extension

Capital Allowances

On the purchase of property/assets by a company where the benefit is derived over several accounting periods, “capital allowances” may be available to allow the business to make a deduction for some/all of the costs against their corporation tax bill.

Capital allowances may be claimed on plant & machinery that are kept for use in the business, such as: appliances, equipment, vehicles, integral features of a building (but not the building itself), some fixtures, and costs associated with installing or removing such items.

An asset which qualifies for capital allowances may be installed or fixed in a building, and will therefore also be disposed of when the property itself is sold (e.g. lifts, escalators, alarm systems, electrical systems).

With this in mind, relief may be obtained twice in respect of these fixtures: first when the fixture is acquired, and secondly when the property it is attached to is sold (as enhancement expenditure – see above).

When calculating a capital gain, there is no requirement to adjust the allowable cost in respect of capital allowances. Therefore, regardless of the relief that has been received under capital allowances, a full deduction is made in respect of any enhancement costs.

On the disposal of the property, an election should be made between the vendor and the purchaser to identify the portion of the sale proceeds that relates to the fixtures of the property. This value is used when calculating the balancing allowance/charge for capital allowances.

It should be noted in relation to the sale of property that in order for the purchaser to obtain capital allowances on historic qualifying expenditure, the seller must have allocated the qualifying expenditure to the relevant capital allowances pool, or claimed first year allowances, before they cease to own the property. Where the seller has not pooled the expenditure, or claimed first year allowances, the purchaser is not permitted to claim capital allowances on that expenditure.

Indexation Allowance

Indexation allowance is an additional deduction available to companies to account for inflation and applies to both the initial acquisition cost and any subsequent enhancement expenditure incurred on the asset/property.

In the Autumn Budget 2017, the government announced that indexation allowance for capital gains will no longer apply from 1 January 2018. Where an asset was acquired before this date, a deduction may be applied for the period up to 31 December 2017.

Conclusion

It is important that the legislation is applied properly when calculating capital gains for companies. Valuable allowances are available which may result in a reduced gain and a lower corporation tax bill.

If you have any queries regarding the above, please contact a member of our team for a no-obligation chat.