A musician client purchased an instrument some years ago. At the time, the allowable Capital Allowances were claimed. He now finds he can sell it at a much higher price than cost, the intention being to use the proceeds (to which he would need to add further funds) to upgrade to something pricier. The new instrument would also be used in the business.
I understand that the 'profit' (difference between the original cost and the proceeds) would be a Capital Gain. The replacement asset would be a business asset and an Annual Investment Allowance would be available. The claim for the AIA could be restricted to wiping out the Capital Gain (after annual exempt allowance) leaving the balance of the cost of the replacement available for WDA in future. But, if the sale and subsequent purchase are not in the same year, would the Capital Gain be unrelieved and tax due? That would scupper the purchase of the replacement.
Or am I missing something?
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Between capital allowances and CGT, unless there is a loss.
Instrument 1, you claimed CAs originally, and the unrelieved balance is sitting in a pool. You have a balancing adjustment, which is calculated (in the case of a sale at a profit) by deducting the cost of the asset from the pool.
You calculate the gain on instrument 1 by deducting the cost from the sale proceeds.
Instrument 2, you claim CAs as normal. If you can claim AIA the zero balance goes into the pool (before making the above balancing adjustment if both purchase and sale occur in the same period).
If the purchase of the new instrument occurs within one year before and three years after the sale of the old instruments, and both instruments are in qualifying classes, you can claim rollover relief for CGT purposes.
However, unless your client is a satellite player, I doubt that rollover relief will be available.
Please can you not use the phrase "or am I missing something?"
How much was the old instrument sold for?
Portia. How, do you think, a capital gain would arise on a satellite or, for that matter, a space station? Just curious and you seem to be the person to ask for some reason.
Triggle
I do not think you have to bring them back down to terra firma in order to be able to sell them.
Yes
That is nearly right. The amount of loss that can be so offset is limited to £50,000, and must first be set against any income that arises in the tax year, before setting it against CGT.
My understanding is that the £50,000 loss restriction is only against income assessable in the tax year that the loss arose.
A trading loss arising in the tax year can, however, be set off against capital gains arising in that tax year without restriction.
Do I win a goldfish in a jam jar?
You can have a goldfish
But it comes in a plastic bag, and not a jam jar. You are correct. If the OP has nothing else but a £120,000 CGT gain and a £200,000 purchase qualifying for AIA could create a loss of £108,900, and set it against the gain, leaving no liability.