CGT and F&F

CGT and F&F

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I am confused by an example (example 1, for those of you with the publication) in the article by Ray Chidell at page 8 of the October 2006 issue of Tax Adviser. No doubt my reasoning is flawed but I should be grateful if someone would tell me where.

For the benefit of those of you without the publication:

A Ltd buys a property for £1m excluding moveable furniture but including F&F to the value of £150K on which CAs are claimed. The property is later sold for £1.5m against which it is suggested that the base cost is £1m not £850K (for which the authority cited is s.41(1) TCGA 1992). This supposedly gives rise to a legitimate double counting of relief, ie within the CA comps and CGT comps for the F&F element.

My interpretation:
s.47(1)(b) brings within the scope of s.47 the expenditure on F&F.
s.47(2)(b) then requires separate computations to be made in relation to the gain on the F&F as distinct from the rest of the property.

When considering the application of s.41, we have to consider that separately in relation to each computation.

The proceeds attributable to F&F (restricted to cost) would be brought into account as a disposal in the CA comps.

If the F&F element in isolation gave rise to a loss then s.41(2) kicks in to negate the double-counting.

If the F&F element in isolation gave rise to a gain, then you would get a 100% clawback of the capital allowances claimed.

There may of course be a cash-flow advantage to claiming the CAs, and depending on the date there may be indexation allowance to enhance, and taper relief to diminish, the cost in the CGT comps so that it may not be a one-to-one correlation anyway. But am I right in suggesting that the double availability of relief is overcooked?

Clint Westwood

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By AnonymousUser
21st Nov 2006 11:56

It's OK
s.47 deals with the treatment of individual wasting assets. The apportionment at (2)(b) refers only to the position where such an asset has been used either partly for non-trade purposes or wholly for trade purposes for only a part of the relevant period. It does not refer to the apportionment of expenditure on a building/fixtures and therefore does not mean that in the instant case you need to treat the fixtures and the heritable separately.

While there may appear to be a double-counting, this is remedied by the apportionment of the proceeds. Apart from the s.41 provisions, the capital gains tax and capital allowances treatments are mutually exclusive. An asset was bought for £1m and sold for £1.5m. There is a gain of £500k, end of story, for CGT purposes. If proceeds are attributed £150k to fixtures then all capital allowances will be clawed back. If fixtures proceeds are nil then no balancing charge, but the purchaser will be unable to claim any allowances.

In any event, there is no evidence that you need to consider gains or losses separately for each element of the sale. My understanding is that if the sale proceeds had instead been £900,000, ie a capital loss of £100k, then if say fixtures 'proceeds' had been nil (balancing allowance £150k) you would need to restrict the loss by £100k only - cannot convert loss to gain, whereas Revenue suggest full clawback of £150k, but that would result in gain of £50k!)

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