Chargeable Gains for Companies

1. Chargeable Gains for Companies Week 6

2. 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 X Less incidental disposal cost (X) net Proceeds X Less: Allowable expenditure (X) Un-indexed gain X Less indexation allowance (X) Chargeable gain/[allowable loss] X

3. 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

4. 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.

5. 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.

6. 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 X Less Allowable Cost (X) Chargeable gain X

7. 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.

8. Pro forma for Company’s share pool No. Cost. Indexed cost £ £ Purchases X X IA to next operative event X Purchase XXX IA to next operate event X X X Disposal (X)(X) (W1) (X) (W2) Pool carried Forward XXX 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 X Less Cost (W1) (X) Un-indexed gain X Less indexation Allowance (W2-W1) (X) Chargeable gain X

9. 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.

10. 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

11. 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

12. 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