Taxation 8 - Lecture notes 8 PDF

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Chargeable gains...

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Corporate Chargeable Gains • • • • •

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In many ways, the rules for corporate chargeable gains are very similar to those for individuals We covered Capital Gains Tax in Lecture 7 These slides focus on the differences between companies and individuals There are three key differences: Companies: – pay Corporation Tax on their gains, and not Capital Gains Tax – are not entitled to the Annual Exemption – but claim Indexation Allowance instead – Different matching rules for shares and securities Procedure: – Chargeable gain or allowable loss for each disposal made in accounting period (AP) is calculated – If total gains exceed total losses, net gains are included in company's taxable total profits (TTP) for period – If total losses exceed total gains, net losses are carried forward and set against future chargeable gains

Indexation allowance • Introduced in 1982 – intended to remove inflationary element from chargeable gains – calculated separately for each item of allowable expenditure – equal to amount of that expenditure multiplied by an "indexation factor" • Indexation factor is (RD – RI)/RI where: RD is the RPI for the month of disposal RI is the RPI for the month in which the expenditure was incurred • Indexation factors are rounded to 3 decimal places •

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RPI goes down between the month in which expenditure is incurred and the month of disposal? – Indexation allowance available in relation to that expenditure is £nil Cannot be used: – to convert unindexed gain into allowable loss or – to increase unindexed loss RPI (Retail Prices Index) is on page 381 of Melville In the exam you will be given the relevant RPI figures

Example • Jay’s Woodturning Ltd purchased a workshop for use in its trading business for £10,000 in January 1983. Legal charges and other allowable costs of acquisition were £500. In January 1984 an extension was built for £3,000 and major repairs undertaken costing £1,000.

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The whole property was sold for £100,000 on 28th January 2018, with incidental disposal expenses of £1,500. RPIs: January 1983 = 82.61, January 1984 = 86.84, January 2018 = 275.3 Required: Compute the chargeable gain arising on the disposal of the workshop. The company’s accounting period is the year ended 31 August 2018

Disposal of shares and securities • A disposal of shares or securities by a company is matched against acquisitions of those shares or securities in the following order: 1. shares acquired on the same day as the disposal 2. shares acquired in the previous 9 days (FIFO) 3. shares in the s104 holding 4. shares in the 1982 holding 5. shares acquired before 6 April 1965 • These rules are more complex because of the effects of indexation allowance and the fact that rebasing is not compulsory for companies S104 holding • Share acquisitions made on or after 1 April 1982 are pooled in the s104 holding • A record is kept of the number of shares in the holding, their total cost and their "indexed cost" • On each operative event (acquisition or disposal): – indexed cost of the holding is first increased by change in RPI since the previous event • On an acquisition: – the number of shares acquired is added to the number of shares in the holding and their cost is added to cost and indexed cost • On a disposal: – the number of shares disposed of is subtracted from the number of shares in the holding and both cost and indexed cost are reduced in proportion to the number of shares disposed of • Unindexed gain or loss on the disposal is equal to disposal proceeds minus the amount subtracted from the cost of the holding • Indexation allowance is equal to amount subtracted from indexed cost of holding minus amount subtracted from cost of holding Bonus and rights issues • Uplift number of shares in each of taxpayer’s existing holdings • Rights shares allocated to s104 holding: – also increase cost and indexed cost of holding by cost of rights shares...