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Interaction of CGT and capital allowances

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Company 1 sold an item of plant to connected (ungrouped) company 2 on cessation for £7k. The equipment had originally cost £28k. An election for TWDV transfer was made (balance on main pool was nil). So:

Nil disposal proceeds to main pool.

Capital loss of £21k, but loss restricted to nil by TCGA 1992 s41

That seems straightforward

However, client has now sold the plant for £13k. There is therefore an unrestricted balancing charge of £13k. Not a problem, but in addition to that it seems that company 2 has a chargeable gain of £6k. I know that the two tax codes are mutually exclusive but it does seem that there is a double charge here? (£6k chargeable gain and £6k of balancing allowance that wouldn't have been there were it not for the look-through effect of the TWDV election)

TIA

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15th Mar 2019 09:18

Thankfully CGT isn't an issue here!

Seriously, I've read the question twice and there must be more than just the misnaming of the tax at stake here because I can't understand what you're asking at all.

Company 1 buys an asset for £7K, takes on the nil TWDV, then sells it for £13K, so makes and is taxed on a £13K gain.

Company 2 sells an asset for £7K but transfers the TWDV so makes no gain. That's it done at that point.

The overall tax position there is the same as if there was no transfer of TWDV and there was a £6K gain in company 1 and £7K gain in company 2.

Which bit of that is the problem that's caused you to calculate an extra gain?

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to Duggimon
15th Mar 2019 11:17

I agree, although my workings are different (and I don't understand why you think CGT - or at least tax on chargeable gains - is not an issue).

Company 1 buys an asset for £28k, claims 100% AIA and then sells to Company 2 for £7k. So, as the questioner says, nothing to affect the pool and the capital loss is reduced to nil.

If Company 2 sells for £13k it has a balancing charge of £13k and a capital gain of £6k. Total ‘profits’ of £19k.

If the TWDV election didn’t apply then Company 1 would have had a balancing charge of £7k (again no capital loss).

Company 2 would have had a balancing charge of £6k and a capital gain of £6k - total £12k. Plus the £7k charge in Company 1 gives you £19k

I think the problem here is not the TWDV issue but the fact that there is a chargeable gain.

If Company 1 had sold the plant to a third party for £13k then it would simply have had a balancing charge of £13k. So, unwittingly or otherwise, it seems that the arrangements might well have have resulted in more tax being payable than necessary - did the onward sale by Company 2 immediately follow the transfer?

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to Wilson Philips
15th Mar 2019 11:27

Quote:

I agree, although my workings are different (and I don't understand why you think CGT - or at least tax on chargeable gains - is not an issue).

Because we're dealing with companies, as you've said it's corporation tax on chargeable gains, not capital gains tax.

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to Duggimon
15th Mar 2019 12:01

I assumed that's what you were getting at, but I still don't understand why you didn't factor the chargeable gain into your calculations.

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to Wilson Philips
15th Mar 2019 14:18

I calculated it wrongly I guess!

I'd always thought it was no gain no loss and just moving the asset from one company to another, I'm not sure why you'd use it if it results in extra tax being paid.

As you can no doubt guess, it's not an election I've ever had occasion to make.

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to Duggimon
15th Mar 2019 14:30

The election is to transfer the assets at TWDV for capital allowance purposes, and has nothing to do with chargeable gains.

The transfer would have been no-gain/no-loss (without need for any election) if the companies were grouped but the questioner says that they are not.

In any event, as I think we have established, the election itself has not resulted in additional tax. It is the fact that the asset was transferred from one company to another before being sold that gives rise to the potential chargeable gain. If for some reason the market value at date of transfer was actually only £7k then there would, as I see it, be such a chargeable gain. In reality, though, I think it a reasonable argument that the market value was equal to or greater than the proceeds from an unconnected party sale.

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15th Mar 2019 12:24

Having thought about it, I think the answer lies in the calculation of the chargeable gain. Although Company 2 may have paid £7k for it, if it managed to sell the asset for £13k would it not be reasonable to argue that the market value at the time of transfer was equal to or greater than £13k (especially if the onward sale took place shortly afterwards - it would be helpful to understand the timeline here)?

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By mommaB
03rd Apr 2019 17:15

I think Duggimon's first instincts are correct and you are mixing your taxes here. You are right that there is a taxable £13k balancing charge on disposal - but the £6k is not a taxable capital gain, it is a profit on disposal, and just like a loss on disposal or depreciation this is not a taxable item.

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