F6 (UK) Taxation

The fiscal year or tax year is from 06th April, 2009 to 05th April, 2010.

A. PROPERTY/RENTAL INCOME
• Any income which is taxable on accrual basis, it means that we can pro-rate
that income.
• Any income which is taxable on cash basis, it means that we cannot time
apportion that income.
• Property income is taxable on accrual basis.
• Expenses are also incurred, which are of two types:
I. Deductible Expenses
II. Non-deductible Expenses
• List of expenditures that are deductible:
I. Revenue Expenditures:-
a. Repairs c. Decoration
b. Maintenance d. Renovation
II. Only bad debts written off, provided that;
a. Tenant has left the property
b. Legal proceedings have been started for the recovery.
III. Taxes are not expenses but water and council tax must be treated like expense.
IV. An agent, accountant or lawyer’s fee related to RENTAL INCOME is
deductible.
V. In case of FURNISHED accommodation, 10% wear and tear allowance is
allowed.
Ø Wear and Tear allowance = (Rent-bad debts-water and council tax) × 10%
VI. Insurance expense is deductible according to relevant fiscal year.
• List of expenditures that are non-deductible:
I. Capital Expenditures:-
a. Improvement.
II. Provision and estimates are not deductible, e.g., bad debts and depreciation
expense.
III. Expenditures incurred in duration when the owner lives in the property are not
deductible.
• Every person receives personal allowance on one property only.
• Revenue expenditure is never time apportioned.
• Rent a Room Relief = £4,250.
• In case of couple, rent a room relief splits into 50%.
• In case of rent a room, either Rent a Room Relief can be deducted OR
Allowable Expenditures, and the resulting answer or income is selected which ever is
lower.
A. Premium
• Premium is taxable on cash basis.
Ø Relief on Premium
2% (n – 1) × Amount of Premium
• Extra relief is in the case of sub-let.
Ø Extra Relief
Taxable premium of Head Lease × Duration of Sub Lease
Duration of Head Lease

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 Ø Taxable Premium
Amount of Premium xxx
Less: Relief (xxx)
Taxable Premium xxxx
• Personal Allowance = £6,475.
Ø Property Income Tax Rates
£1 ----------à £37,400 20%
£37,401 ----------à above 40%
B. Furnished Holiday Letting
• Profits arising from the commercial letting of furnished holiday
accommodation are still assessable as property business income but it is
treated as though the profits arose from a single and separate trade.
• As a result, separate records regarding these properties have to be kept.
a. Qualifying Conditions:
• The property is situated in the UK or an EEA country.
• It is let furnished.
• The letting is on a commercial basis with a view to the realization of profits.
• It is available for commercial letting, to the public generally, as holiday
accommodation for not less than 140 days a year.
• The accommodation is actually let for at least 70 days a year (excluding
periods of ‘long term occupation’).
Ø Long-term occupation is defined as a period of more than 31 consecutive
days when the property is let to the same person.
• Where a tax payer owns more than one property, the 70 days test is satisfied if
the average number of days for which the properties are let in the year is at
least 70.
• The property must not be let for periods of ‘long term occupation’ in excess of
155 days in a year.
• It is possible for the property to be let to the same person for more than 31
days, however, when aggregating all such periods of longer term occupation
(which could be a few periods of letting to different persons), the total must
not exceed 155 days.
b. Tax Treatment of Furnished Holiday Lettings
• Relief may be claimed for any losses sustained as if they were trading losses
and not property business losses. The losses can therefore be offset against
other income and not just other property income.
• The profits are treated as relevant earnings for the purposes of relief for
personal pension scheme contributions.
• Capital gains tax roll-over relief and entrepreneurs’ relief is available.
• Normal capital allowances will be available in respect of plant and machinery
(AIA, C.A., 10% FYA, 20% WDV and etc.)
• No 10% wear and tear allowance in furnished holiday letting.
2. INTEREST INCOME
• Interest income is taxable on cash basis.
• Interest from banks and building society is 20% tax credit, if nothing is
mentioned, then the amount of interest is net.
Ø Interest Income Tax Rates
£1 -------à £2,440 10%
£2,441 -------à £37,400 20%

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 £37401 -------à above 40%
3. DIVIDEND INCOME
• Dividend from UK Company is 10% tax credit.
• Dividend has to be taxed at the end of all other sources of income.
• Dividend income is not refundable under any circumstances.
Ø Dividend Income Tax Rates
£1 -------à £37,400 10%
£37,401 -------à above 32.5%
4. EMPLOYMENT INCOME
• Employment income is divided into:
a. Salary – Whatever you receive in the course of employment, e.g., tip.
b. Benefits in kind – Cash and Cash Equivalent.
A. BENEFITS:
I. Rent Free Accommodation:
• Higher of rent paid by the employer OR Market value of the rent.
• In case of expensive accommodation, i.e., accommodation costing more than
£75,000, the rent benefit will increase.
Ø Rent xxx
Add: (Cost of accommodation – £75,000) × 4.75% xxx
Rent Benefit xxx
• In case of expensive accommodation, if capital expenditure incurred, it would
be added to its value but only previous fiscal year’s expenses will be included.
• If 06 years of acquisitions have passed, then we will replace original cost of
expensive accommodation with M.V.
• In case of business use, the benefits will be reduced.
• Any contribution made by employee towards rent free accommodation will
reduce the benefit, i.e., if employee pays some amount to the purchase of
accommodation, it will reduce the cost of accommodation and if the employee
contributes to the use of accommodation, it will reduce the rent free accommodation
benefit.
II. Car Benefit:
• When car is provided for personal use only.
Ø Car Benefit = List Price × CO2 %
Ø List Price
Purchase Price xxx
Add: Cost of Accessories xxx
Import Duties xxx
Less: Contribution made by employees (xxx)
xxxx
• Employee can make a maximum contribution of 5,000.
• Maximum list price is 80,000.
• For every increase in 05 Gms above 135 Gms, CO2 emission will increase by
1%.
• Maximum CO2 emission is 35%.
• Round off rule is not allowed; consider the value before the point.
• If employee contributes toward the purchase of car, it will reduce the list
price of the car.
• If employee contributes toward using the car, it will reduce the car benefit.
a. Petrol Cars:

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 Ø CO2 emission per KM
1 ----------à 120 Gms 10%
121 -------à 135 Gms 15%
b. Diesel Cars:
• All the calculation to be carried out in accordance with petrol cars, but for CO2
emission add 3% to it. So, 15% for Petrol Cars = 18% for Diesel Cars.
III. Fuel Benefit:
Ø £16,900 × CO2 %
• Partial reimbursement will not result in the reduction of fuel benefit.
• 100% reimbursement means, there is no fuel benefit.
IV. Van Benefit:
• The use benefit of van is £3,000/tax year.
• The fuel benefit of van is £500/tax year.
V. Cash or Cash Alternative:
• If employee opts the cash option, then the whole cash is taxable.
VI. Beneficial Loan:
• Either it is interest free or employee is paying interest lower than market
interest.
• Interest rate in UK = 4.75%.
• Accurate and Average Method both will be used, but the lower one will be
selected.
• In average method,
Closing Loan; loan taken up to the end of the fiscal year.
Opening Loan; if previous FY’s loan is C/F or loan taken at the 1st day of FY
or the first loan.
• An exemption for small loans applies where all an employee’s cheap or
interest free loans (excluding loans which qualify for tax relief) total no more than
£5,000.
• If an interest free or cheap loan is used for a purpose that fully qualifies for tax
relief (e.g. loan to buy plant used wholly for employment), then there is no benefit.
• If all or part of a loan to an employee (whether or not made on low-interest or
interest-free terms) is written off, the amount written off is treated as a benefit and
charged to income tax.
VII. Occupational Pension Scheme:
• Contribution made by employee in occupational pension scheme is
taxable/deductible expense.
• Contribution made by employer on the behalf of employee in occupational
pension scheme is exempted.
VIII. Job Related Accommodation:
• An example would be “Scientist”.
• The job related rent is exempted.
• The benefit of ancillary services is lower of:
Amount of ancillary services OR 10% of net earnings.
Ø Net Earnings = Salary + Bonus + Other Benefits – Allowable Expenses
• Other benefits exclude ancillary services.
• If accommodation is not job related then the amount of ancillary services is
taxable benefit.
IX. Approved Mileage Allowance (AMA):
• Home to Office and vice versa miles are not allowable.

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 Ø First 10,000 miles p.a. £40 pence
Over 10,001 miles p.a. £25 pence
If, AMA < Received, then pay the excess
If, AMA > Received, then deductible expense.
X. Personal Pension Scheme:
• Contribution in personal pension scheme is not a taxable expense.
• Due to personal pension scheme, the limit of second band will increase, 20%
tax credit.
Ø £37,400
Add: Gross Amt of P.P.S. xxx
xxxxx
XI. Age Allowances:
• The age allowance applies to personal allowance.
• The maximum income limit is £22,900.
Ø Standard £6,475
65-74 £9,490
75 and above £9,640
Ø Personal Allowance (respective age limit) xxx
Less: (taxable income – £22,900) × 0.5 (xxx)
Resulting Personal Age Allowance xxxx
XII. National Insurance Contributions:
a. Class 1 – Employee
Ø £1 -------à £5,715 Nil
£5,716 -------à £43,875 11%
£43,876 -------à above 1%
b. Class 1 – Employer
Ø £1 -------à £5,715 Nil
£5,716 -------à above 12.8%
Ø Class 1A -------à 12.8%
Class 1A NIC = Taxable Benefits × 12.8%
• Class 1 employee is applicable on salary plus bonus plus authorized mileage
allowance, provided that AMA should be excess than 40 pence per mile.
• Class 1 employer applies on all those items to which class 1 employee is
eligible.
• Class 1A relates to employer and it is applicable on all the taxable benefit
excluding those benefits which are covered in class 1 employer.
XIII. Rules for Bonus:
• Bonus is taxable at the earlier of:
a. When earning is determined @ meeting
b. When bonus is received without prior notice.
c. When bonus is credited to the accounts.
• This rule is for the directors.
• If individual is an employee then whenever he receives the bonus, it will be
taxable on cash/receipt basis.
• Bonus is never time apportioned.
GENERAL POINTS TO PONDER
• In UK, a person who is above 16 is income earning.
• When tax is calculated, first non-savings income and then savings income.
Ø Savings = Interest, Dividend.

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 Ø Non-Savings = Property, Employment, Self-Employment.
• Personal allowance will be deducted 1st from non-savings income, while
computing income tax liability.
• Gifts received from employer are taxable benefit, on the basis of M.V. on
current basis.
• When asset provided for personal use, other than car, then use benefit is 20%
of cost of that asset.
• In UK, a person who is earning £8,500 or above per annum is a highly paid
employee.
• If health club relates to organization then the benefit is direct cost to the org.
• If gym does not relate to org. then the benefit is whatever cost employer bears,
if employee contributes any amount then it will be reduced.
• Temporary workplace means, transfer should be of not more than 24 months.
• Where an employee passes their normal permanent workplace on the way to a
temporary workplace, relief will still be available provided the employee does not
stop at the normal workplace, or any stop is incidental, e.g. to pick up some papers.
• An employee may travel to a temporary workplace without that journey being
significantly different from his or her normal commuting. This may be the case where
the temporary workplace is situated near the permanent workplace, and in these
circumstances relief is denied.
• EXEMPT BENEFITS:
§ An employer’s contribution to a registered pension scheme.
§ The use of subsidized on-site restaurant or canteen facilities provided they are
available to ALL employees.
§ Luncheon vouchers up to a value of £15p per working day.
§ The provision of a car parking space provided at or near the place of work,
including the reimbursement of the cost of such a parking place.
§ The provision of ONE mobile telephone by the employer to an employee.
§ Certain benefits aimed at encouraging employees to travel to work other than
by private car. This exemption includes work buses, subsidies to public bus
services, and the provision of bicycles and cycling safety equipment.
§ Christmas parties, annual dinner dances, etc. for staff generally, provided they
are of modest cost (up to £150 pa per head).
§ Workplace nurseries for child care.
§ Relocation and removal expenses up to £8,000.
§ A payment of up to £55 per week to an approved child carer. However, the
provision of cash allowances or vouchers to meet child care expenses with
non-approved carers are taxable.
§ Expenses incurred by employees whilst away overnight on company business,
within UK does not exceed £5, outside UK does not exceed £10.
§ Home worker’s additional household expenses of up to £3 per week (£156 per
tax year) can be paid tax-free without the need for any supporting evidence.
However higher amount can be exempted in respect of supporting evidence.
§ Entertainment provided for an employee, by reason of his or her employment,
by a genuine third party, e.g. a ticket or seat at a sporting or cultural event
provided by a business contact or client, to generate goodwill.
§ Gifts received, by reason of his or her employment, from genuine third parties,
provided the cost from any one source does not exceed £250 in a tax year.

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 § Long service awards in kind (e.g. gold watches) are exempt up to a cost of £50
for each year of service of 20 years or more.
§ Provision of travel, accommodation and subsistence during public transport
disruption caused by industrial action.
§ Employer funded training, where the expenses of training are paid for by the
employer no taxable benefit arises on the employee.
• If gift is given other than car, then obviously no payment.
• Treatment of gift aid donation scheme is same as personal pension scheme.
• EXEMPT INCOME:
§ Income from National Saving Certificates
§ Statutory redundancy money
§ Winnings
§ Scholarships
§ Interest on damages for personal injuries
§ Income from investments made through individual savings accounts (ISAs)
§ Local authority grant.
• Individual Savings Account:
Invest up to £3,600 per tax year in cash ISA and up to £7,200 per tax year in a
stocks and shares ISA. This is subject to an overall investment limit of £7,200.
Investments within an ISA are exempt from income tax and capital gains tax.
5. SELF EMPLOYMENT/BUSINESS INCOME/TRADING INCOME
• Business income is related with accounting period and not fiscal year.
• Adjustments begin with net accounting profit.
• Specific provisions are allowed.
• ADJUSTMENTS:
I. Income not considered should be taken into consideration.
a. Accrual Accounting CONSIDERED AS cash accounting.
b. Goods taken by owner.
v If transaction not recorded, sales amount will be added back.
v If transaction is recorded at cost, then only profit element will be added
back.
II. Income from other sources should be deducted.
III. Expenses not allowed should be added back, e.g., depreciation expense,
provision for bad debts, capital expenses.
IV. Expenses of other sources of income should be added back.
V. Personal expenditure of owners is not allowed, except for those which are
wholly and exclusively for business purposes.
VI. Premium on lease is not deductible, but amortization of lease premium is
deductible.
a. Lease amortization premium is only available only when lease duration
is equal or not more than 50 years.
Ø Premium xxx
Less: Relief on Premium (xxx)
xxxx
÷ by Lease Duration
Amortization of Lease Premium xxxx
VII. Taxes are not expenses, but water and council tax of business premises
must be treated like expense.
VIII. Salary to owner is not allowable expense.
IX. Drawings (cash) of owner should be added back.

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 X. Bad debts written off/ irrecoverable debts/ impaired debts are deductible.
XI. Theft conducted by owner is not allowed, but if conducted by employee is
allowed/ deductible.
XII. Any revenue expenditure, incurred in the seven years before a business
commences to trade, is treated as an expense on the day that the business
starts trading.
A. Subscriptions and Donations
• Trade or professional association subscriptions are normally deductible since
they will be made wholly and exclusively for the purposes of the trade.
• In the case of charitable donations they must meet three tests to be allowable:
v First, they must be wholly and exclusively for trading purposes (e.g.,
promoting business name).
v Second, it must be local and reasonable in size in relation to the business
making the donation.
v Third, it must be made to an educational, religious, cultural, recreational or
benevolent organization.
• If the donation is disallowed but the payment was made to a charity, the
taxpayer can instead claim relief under the Gift Aid provisions.
• Subscriptions and donations to political parties are not deductible.
• Non-charitable gifts are not allowable, except as set out below.
B. Entertaining and Gifts
• Entertainment expenditure is disallowed.
• The only exception is for expenditure relating to employees, provided it is not
incidental to the entertainment of others.
C. Gifts to Employees
• Gifts to employees are normally treated as allowable trading expenditure.
• Care must be taken, however, as the gift may fall within the benefit rules and
be assessed on the employee as employment income.
D. Gifts to Customers
• Gifts to customers are only allowable if:
v They cost less than £50 per recipient per year; and
v The gift is not of food, drink, tobacco or vouchers exchangeable for goods;
&
v The gift carries a conspicuous advertisement of the business making the
gift.
E. Legal and Professional Charges
• In order to determine whether legal and professional charges are allowable, it
is important to review the reasons for the business incurring the costs.
• As a general principle, where expenditure is incurred for the purposes of the
trade, the expenditure is allowable. E.g.:
v Legal fees chasing trading debts.
v Charges incurred in defending the title to fixed assets.
• Where expenditure is of a capital nature, it is disallowable. E.g.
v Fees associated with acquiring new fixed assets
v There are the following exceptions:
o Fees and other costs of obtaining long-term debt finance are allowable for
a sole trader.
o The cost of registering patents is allowable.

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 o The expense of renewing a short lease (i.e. less than 50 years) is allowable,
although the legal expenses incurred on the initial granting of the lease are
not.
F. Impaired Debts and Allowances for Debtors
• The following are allowable items:
v The write-off a trade debt (therefore, the recovery of a trade debt
previously written-off is taxable).
v An allowance for trade debtors to reflect the potential irrecoverability or
impairment of debtors, provided it is calculated in accordance with UK
GAAP. Again, the reduction in an allowance for trade debtors is taxable
income.
• The following items are disallowable:
v The write-off of a non-trade debt (e.g. a loan to a customer or a former
employee).
G. Capital Allowance
• Following are the plant and machinery pool items:
v Plant and machinery
v Computer – hardware and software
v Cars
v Lorries
v Office equipment
v Air conditioning system
v Alterations to the building for the installation of plant and machinery
• They are available on 20% reducing balance basis.
• They are available according to the accounting period.
• It will not be affected by date of purchase, consider accounting period.
• Incase of disposal, the amount of disposal will be restricted to the lower of,
sales proceeds OR original cost of machinery pool items.
• No capital allowance will be calculated in the year of disposal.
a. Annual Investment Allowance (AIA)
• The AIA is a 100% allowance for the first £50000 of expenditure incurred by
a business on plant and machinery.
• The key rules for the allowance are as follows:
v Available to all businesses regardless of size;
v Available on acquisitions of general plant and machinery and acquisitions
of ‘special rate pool’ items;
v Not available on any type of cars;
v Limited to a maximum of £50000 expenditure incurred in each accounting
period of 12 months in length;
v For long and short accounting periods the £50000 allowance is pro-rated;
v Not available in the accounting period in which the trade ceases.
• Note also that:
v The taxpayer does not have to claim all/any of the AIA if he does not want
to,
v Any unused AIA can not be carried forward or carried back; the benefit of
the allowance is just lost.
• It will therefore be most beneficial for the AIA to be allocated against
expenditure in the following order:
1. Special Pool Assets.

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 2. General Pool Assets.
3. Short Life Assets.
4. Privately Used Assets.
b. Further Allowances Available
• Expenditure on plant and machinery in the main pool not qualifying for AIA
will qualify for Writing Down Allowances (WDA).
• Note that the business can choose the expenditure against which the AIA is
matched.
• Expenditure on plant and machinery in the main pool qualifying for AIA but
falling above the 50000 AIA limit will qualify for further allowances as follows:

Additions Additions
Pre 6th April 2009 and Between 6th April 2009
w.e.f. 6th April 2010 To 5th April 2010

Writing Down Allowance (WDA) First Year Allowance (FYA)

Writing Down Allowance (WDA)
• An annual WDA of 20% is given on a reducing balance basis.
• It is given on:
v The unrelieved expenditure in the pool brought forward at the beginning of
the period of account (i.e. tax written down value TMDV).
v Any additions on which the AIA is not available.
v Any additions pre 6th April 2009 and w.e.f. 6th April 2010, not covered by
the AIA.
v After taking account of disposals.
• The TWDV brought forward includes all prior expenditure, less allowances
already claimed.
• Note that the WDA is not available on additions between 6th April 2009 to 5th
April 2010, as these are eligible for the AIA and temporary 40% FYA instead.
First Year Allowance (FYA)
• The relief for FYA is calculated as follows:
v In the period of acquisition, a 100% FYA is given instead of the WDA.
v Unlike the WDA; the FYA is not pro-rated for periods of greater or less
than 12 months.
v FYAs are not given in the final period of trading.
• Two types of FYA are available:
1. Temporary FYA on plant and machinery.
2. FYA on low emission cars.
1. Temporary FYA on plant and machinery
• A temporary FYA of 40% is available for expenditure on main pool items that
are not covered by the AIA.
• The rules are as follows:
v Only applies to expenditure between 6th April 2009 to 5th April 2010.
v Main pool items only.
2. FYA on low emission cars

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• Expenditure on low emission cars by all businesses were eligible for a 100%
first year allowance.
• A low emission car is one which emits 110 or less grams per kilometer of
CO2.
c. Special Rate Pool
• The special rate pool or special pool is a pool of qualifying expenditure that
operates the same way as the general pool except that:
v The WDA is 10% for a 12 month period (rather than 20%)
v The temporary FYA of 40% is not available.
• Note that:
v The AIA is available against this expenditure (except on high emission
cars) and
v The business can choose the expenditure against which the AIA is
matched.
Qualifying Expenditure
1. long-life assets
2. integral features of a building or structure
3. thermal insulation of a building
4. high emission cars purchased on/after 6th April 2009
1. Long-life Assets
• Long-life assets are defined as plant and machinery with:
v A total cost of at least £100,000 (for a 12 month period) and
v An expected working life of 25 years or more.
• Where the business spends less than 100,000 p.a. on long-life assets, they are
treated as normal additions in the general pool.
• The following can never be classed as long-life assets:
v Motor cars.
v Plant and machinery situated in a building that is used as a retail shop,
showroom, hotel or office.
2. Integral Features of a Building or Structure and Thermal Insulation
• Integral features of a building or structure include expenditure incurred on the
following:
v Electrical (including lighting) systems;
v Cold water systems;
v Space or water heating systems;
v Powered systems of ventilation, air cooling or air purification;
v Lifts and escalators.
3. Thermal Insulation of a Building
• Thermal insulation in all business buildings (except residential buildings in a
property business) is also included in the special rate pool.
d. The Small Pool WDA
• Where the balance immediately before the calculation of the WDA:
v On the general and/or ‘special rate’ pool
v Is ≤ £1000
• The balance can be claimed as a small pool WDA and immediately written off
in that year.
• Note that the £1000 limit is for a 12 month accounting period, it is therefore
pro rated for long and short accounting periods.

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• The claim is optional. However, the taxpayer will want to claim the maximum
allowances available and reduce the balance on the pool to nil.
e. Short Life Assets
• It will have its separate pool.
• It will remain in short life pool for 04 years.
• De-pooling is carried out when there is a balancing allowance as it will save
the tax.
• Every item of plant and machinery can be depooled but car cannot be.
• It qualifies for AIA and temporary 40% FYA.
f. Motor Cars
• Car costing more than £12000 will be treated as expensive car.
• Every expensive car will have its separate pool.
• Once a car declared expensive, it will remain expensive.
• If a car has a cost of more than £15000, then capital allowance will be
restricted to £3000. This capital allowance can change due to more or less
accounting period.
• Incase of lease car, if CO2 is ≤ 160 gms/km, then lease payment of that car will
be considered as deductible expense, but if CO2 ≥ 160 gms/kg, then deductible
expense will be 85% of lease cost.
• Any car purchased after 6th April 2009 will not be treated as expensive car,
CO2 emission will be considered;
Ø 1 -------à 110 gms/km (low emission car)
Ø 111 -------à 160 gms/km (standard emission car, included
in general pool as an addition not qualifying for AIA or FYA)
Ø 161 -------à above (special rate pool item)
g. IBA (Industrial Building Allowance)
• The purpose of IBAs is to provide the business with tax relief for the
acquisition of qualifying industrial buildings.
• IBA is not calculated in the year the machine is disposed off.
Ø IBA = Qualifying Cost × IBA%
• IBA is calculated on the basis of accounting period.
• It is calculated on a straight line basis and the IBA rate is 2%.
• IBA depends on last day use of industrial building, no time apportionment on
the basis of usage.
• No gain (balancing charge) or loss (balancing allowance) on the disposal of
industrial building.
• The relief is given as follows:
Ø IBAs are deducted as a trading expense in calculating the tax-adjusted
trading profit.
Ø IBAs are calculated for a trader’s period of account (i.e. the period for
which they draw up accounts).
• Qualifying Trade OR Industrial Buildings:
Ø A trade carried on a mill, factory or similar premises.
Ø A trade in the manufacture of goods or materials or the subjection of goods
or materials to any process.
Ø Any building or structure provided by the company carrying on one of the
above trades for the welfare of its employees, e.g. a canteen or workplace
nursery.

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 Ø A drawing office used for the preparation of plans for manufacturing or
processing operations.
Ø A trade in the storage of:
§ Goods or materials used for manufacturing purposes, or which are to
be subjected to any process.
§ Finished goods or materials that have been manufactured or subjected
to any process.
Ø A hotel is treated as an industrial building, provided that:
§ The building must be a hotel.
§ The hotel must be open for at least 04 months (120 days) in the season
(1st April to 31st October each year.)
§ When open in the season, the hotel must have at least ten bedrooms
that are available for short-term letting to the public (not more than 30
days per letting).
§ When open in the season, the services provided for guests must
normally include breakfast, evening meal, room cleaning and the
making of beds.
• Excluded Buildings:
Ø Dwelling houses
Ø Retail or wholesale premises
Ø Showrooms
Ø Offices.
• Qualifying Cost of Construction:
• The qualifying cost of an industrial building includes only that expenditure
actually incurred in its construction.
• The cost of the land (and the incidental expenses associated with acquiring the
land) does not qualify for IBAs.
• Where part of a building is not used for a qualifying purpose and the
expenditure on that non-industrial part does not exceed 25% of the total
qualifying cost of the whole building, then IBAs will be given on the cost of
the whole building.
• If the non-industrial part represents more than 25%, IBAs will only be given
on the industrial cost element.
• The total cost of constructing a qualifying building is eligible for IBAs
(subject to the rule on non-qualifying parts of a building) if built by or for the
trader.
• If the building was acquired after construction (but before use) the eligible
cost depends on the type of vendor:
Ø When purchased from a builder the eligible expenditure is the purchase
price (including the builder’s profit margin).
Ø For any other vendor the eligible cost is always the lower of the purchase
price and the construction expenditure incurred.
• As well as the actual cost of constructing the building the following are also
qualifying elements of the construction cost:
Ø Costs in connection with the land that are preliminary to construction do
qualify, including:
1. The preparation of the site in order to lay foundations
2. Cutting, tunneling and leveling the land in connection with the
construction.

13
 Ø Professional fess, notably those of architects, incurred as part of the
construction project.
Ø Capital expenditure on alterations to an existing industrial building.
H. Other Items
• Capital allowances are deductible expense.
• Excess salary to relatives should be added back.
• Patents are business expense OR income and should be added back or
deducted, depending on the circumstances. Incase of net patents and royalties,
gross them by 80%.
• Provisions for future costs (e.g. provision for future warranty costs) are
allowed, provided that they are calculated in accordance with the UK GAAP
and their estimation is sufficiently accurate.
• Compensation for loss of office paid to an employee is allowed, only if for
benefit of trade.
• Counseling services for redundant employees is allowed.
• Damages paid are allowed, only if paid in connection with trade matter.
• Defalcation (e.g. theft/fraud) is allowed, only if by employees, not the
business owner/director.
• Educational courses are allowed, only if for trade purposes.
• Fines are disallowed, unless parking fines incurred on business by employee,
but not business owner/director.
• Payment that constitutes a criminal offence is disallowed.
• Pension contributions to registered pension scheme is allowed, provided paid
(not accrued) by the year end.
• Premiums for insurance against an employee’s death or illness are allowed.
• Redundancy pay in excess of the statutory amount is allowed, but on the
cessation of trading the limit is 3 × the statutory amount.
• Removal expenses are allowed provided not an expansionary move.
• Salaries accrued at year end are allowed, provided paid not more than 9
months after year end.
• Amounts charged or credited to the profit and loss account in respect of
allowances for trade debts are allowable deductions against trading profits.
• Income that is exempt from tax (e.g. interest received on overpaid income
tax).
• Other forms of income (e.g. savings income or dividends) must be deducted in
arriving at the taxable trading profit. However, they may be subject to income
tax by being included elsewhere in an individual’s income tax computation.
• Capital receipt is called chargeable gain or balancing charge and should be
deducted in calculating the tax adjusted trading profit.
• Capital expense is called chargeable loss or balancing allowance and should
be added in calculating the tax adjusted trading profit.
I. National Insurance Contribution (NIC)
Ø Class 2 --------à £2.4/week OR £125/year
Ø Class 4 --------à £1 - -------à £5715 Nil
£5716 --------à £43875 8%
£43876 --------à above 1%
• Class 4 will be applied to tax adjusted trading profit.
General Points to Ponder

14
• If accounting period is of more than 18 months, then we have to split it into 12
months and excess.
• Replacement of any asset is revenue expenditure but addition is capital
expenditure.
A. Basis Period
• Basis period is converting ‘tax adjusted trading profit according to fiscal year.’
v STEPS FOR CALCULATING OVERLAPPING-Profit and Duration:
1. Calculate the taxable profit from the date of commencement of business up to
the end of the fiscal year date.
2. Check, whether the closing date of the 1st period falls within the fiscal year of
the respective year.
a. If yes, then move 12 months back from the closing date of the 1st period.
i. If 12 months going back is not possible (probably the business does not
exist), then move 12 months forward from the date of commencement.
b. If not, then carry on with the next fiscal years until “a” is achieved.
3. Calculate the duration of taxable profit calculated and deduct from the months
given, result is the overlapped duration.
• Losses can never be overlapped.
• The point at which loss overlaps, balancing figure is used.
v CHANGE OF ACCOUNTING DATE:
I. If new accounting period is of less than 12 months, due to change in
accounting date, then overlapping profit and its period will increase.
II. If new accounting period is of greater than 12 months, due to change in
accounting date, then overlapping and its period will decrease.
• When business ceases, then complete overlapping profit will be deducted from
the last profit.
• If two accounting periods fall in one fiscal year then combine profit and
duration of the two periods.
v CONDITIONS TO BE MET FOR VALID CHANGE OF ACCOUNTING
DATE:
• The first accounts to the new accounting date must not exceed 18 months in
length.
§ If the period of account between the old accounting date and the proposed
new accounting date is longer than 18 months, then two sets of accounts
will have to be prepared.
• The change of accounting date must be notified to HM Revenue and Customs
(HMRC) on or before 31st January following the tax year in which the change
is made.
• There must not have been another change of accounting date during the
previous five tax years.
§ This condition may be ignored if HMRC accepts that the present change is
made for genuine commercial reasons.
B. LOSSES
1. Trading
• A trading loss arises when the normal tax adjusted trading profit computation
gives a negative result.
• Where a trading loss occurs, the individual’s trading income assessment will
be nil.
• A loss may only be relieved once.

15
• There is no such thing as overlap losses.
v PROCEDURE FOR DEALING WITH LOSSES:
• The following procedure should be adopted when answering questions:
1. Determine the tax adjusted profits and losses after capital allowances for each
accounting period.
2. Determine when losses arise and therefore when loss relief is available (i.e. in
which tax years).
3. Set up a proforma income tax computation for each tax year side by side and
leave spaces for the loss set off to be inserted later.
4. Set up a loss memo working for each loss to show how it is utilized.
5. If more than one loss – consider in chronological order.
6. Consider each option – be prepared to explain the options, the consequences
of making a claim, the advantages and disadvantages.
7. Set off losses according to the requirements of the question, or in the most
beneficial way if it is a tax planning question.
v CHOICE OF LOSS RELIEFS
• Tax advice should aim to satisfy the following goals of a taxpayer:
Ø Obtain tax relief at the highest marginal rate of tax.
Ø Obtain relief ASAP.
Ø Ensure the taxpayer’ personal allowances are not wasted, if possible.
A. Loss Relief Options
The main reliefs available for a trading loss are as follows:
i. Carry forward against trading profits.
ii. Relief against total income.
iii. Opening year loss relief against total income.
iv. Terminal loss relief against previous trading profits.
B. Loss Relief Options in Ongoing Years
• The choices can be summarized as follows:

Automatic if no
Claim Made
a. Loss Relief in Ongoing Years ----------------à Carry Forward Trading
Optional Losses
b. Loss Relief in Ongoing Years ----------------à Relief Against Total Income
Optional
c. Relief Against Total Income ----------------à Extended 3 Years Carry Back
Optional Against Trading Profits
d. Extended 3 Years Carry Back ----------------à Relief Against Chargeable
Remaining Loss Gains
e. b, c and d ----------------à Carry Forward Trading
Losses

• Where a claim against total income is made, any remaining loss is

automatically carried forward unless the individual makes a claim to:
Ø Set the loss against chargeable gains, or
Ø Extend the loss carry back against trading profits of the previous three
years.
• A claim against gains and the extended carry back claim can only be made
after a claim against total income has been made.
i. Carry Forward of Trading Losses

16
• Automatic relief
• Can carry forward indefinitely
• But must set off maximum amount possible each year, no partial claims
allowed
• Claim must be made to establish the amount of the loss carried forward
• For a 09/10 loss, the claim must be made by 05th April 2014 (04 years from
end of tax year in which the loss arose)
• Carry forward against:
Ø First available
Ø Trading profits
Ø Of the same trade
• If no specific claim made:
Ø Carry all loss forward
• If specific claim made (i.e. against total income or chargeable gains):
Ø Carry forward remaining unrelieved loss
• This option is useful as:
Ø The taxpayer gets the potential of an unrestricted period over which to
utilize the available loss, providing that he continues to trade and makes
subsequent future profits from the same trade.
• This option has following disadvantages:
Ø In a prolonged period for a business, relief may take a long time to
materialize.
Ø Obtaining relief in a later period is less advantageous from the perspective
of cash flow and time value of money.
Ø There is no certainty about the levels of future trading profits and whether
it will be possible to utilize the loss.
ii. Loss Relief Against Total Income
• A taxpayer making a loss in 09/10 has the option to make:
Ø A claim against total income.
• Then, if any loss remains, they can make:
Ø An extended claim against trading profits, and/or
Ø A claim against chargeable gains.
• However, note that the latter two options are only possible after a claim
against total income has been made.
• If relief against total income is claimed, the taxpayer must set off the
maximum amount possible, partial claim not allowed.
• Relief against total income is optional but if claimed it permits the taxpayer to
relieve trading losses against the total income of the:
Ø ‘tax year of the loss’, and/or
Ø Previous tax year.
a. Tax Year of Loss
• The ‘tax year of the loss’ is the tax year in which the loss making period ends.
• E.g. a loss for the year ended 31st December 2009 arises in the tax year 09/10.
Therefore, the ‘tax year of the loss’ is 09/10. The loss can then be set off
against total income in: 09/10 and/or 08/09.
b. Obtaining Relief for the Loss
• Due to the wording “and/or”, the taxpayer has five options:
1. Against total income of the year of the loss, followed by a claim against total
income of the previous year; or

17
2. Against total income of the previous year, followed by a claim against total
income of the current year; or
3. Against total income of the year of the loss only
4. Against total income of the previous year only
5. Make no claim and carry all of the loss forward.
c. Other Points to Note:
• Qualifying interest payments are also deducted from total income. In order not
to waste the relief for interest payments, these should be deducted from total
income in priority to losses.
• Personal allowances are deducted from net income (i.e. total income after
deducting reliefs). Therefore, a claim against total income may involve
wasting personal allowance.
• The two years available for potential claims are treated separately and thus a
claim is required for each year.
• A written claim must be made within one year of 31st January following the
end of the tax year of loss. For a 09/10 loss the claim must be made by 31st
January 2012.
• A taxpayer may have losses for two consecutive tax years and wish to relieve
both against total profits. In these circumstances the total income of a year is
relieved by the loss of that year, in priority to the loss carried back from the
following year.
d. Extended Carry Back Against Trading Profits
• The normal claim against total income permits trading losses to be offset
against total income of the tax year of loss and/or the preceding tax year.
• For losses incurred in 08/09 or 09/10 there is an additional relief available so
that up to 50,000 of loss can be carried back against trading profits of the two
tax years before the preceding tax year.
• The extended relief will operate as follows:
Ø Trade losses of 08/09 or 09/10 can be subject to an extended carry back
claim, although for examination purposes you will not have to deal with
losses arising in 08/09.
Ø The extended relief is optional and does not have to be claimed.
Ø A claim against total income must be made for the loss first, before an
extended carry back claim can be made.
Ø The taxpayer has the usual choice of whether to claim one year or both
years for the claim against total income.
Ø The claim need not be made if the taxpayer has no income in the two years
of a possible claim; he does not have to claim in both years before an
extended claim can be made.
Ø If a loss remains after the normal claim has been made against total
income, then:
o The loss can be carried back
o Against trade profits
o Of the three years preceding the loss.
Ø The carry back to the preceding year is unlimited.
Ø A maximum of 50,000 can be carried back for two further years.
Ø The carry back is on a LIFO basis.
Ø Hence a loss of 09/10 can be carried back against trade profits firstly of
08/09 (if the claim against total income did not include that year) then
07/08 and finally 06/07.

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 Ø This is an extra relief and does not affect the ability of the taxpayer to use
the loss in any other way that they choose.
Ø These rules also apply to losses on furnished holiday lettings which are
treated as trade losses.
iii. Relief of Trading Losses Against Chargeable Gains
• If any loss remains after a claim against total income, a taxpayer can make:
Ø An extended claim against trading profits
Ø A claim against chargeable gains.
• Relief against chargeable gains is optional but if claimed it permits the
taxpayer to relieve trading losses against the gains in the same years as a claim
against total income, i.e. in the:
Ø ‘tax year of the loss’, and/or
Ø Previous tax year.
• A claim may be made in:
Ø Either year in isolation, or
Ø Both years, in any order.
• The relief operates as follows:
Ø A trader is permitted to set trading losses against chargeable gains,
provided:
o The total income of the year in question has been reduced to zero, and
o Unrelieved losses remain.
• There is no need to make a claim against total income for the previous year
but relief against chargeable gains is only granted if total income has been
reduced to nil in the same tax year.
• There is no need to make an extended carry back claim for the relief to be
available.
• If claimed, the unrelieved trading loss is treated as a current year capital loss.
• It takes precedence over both the CGT annual exemption and any capital
losses brought forward.
• The taxpayer must set off the maximum amount possible for a given year; a
partial claim is not allowed.
• The maximum amount is the lower of:
Ø The remaining loss, or
Ø Chargeable gains in the year after the deduction of current year capital
losses and brought forward capital losses.
• The loss relief is offset as follows:
Ø Chargeable gains in year X
Less: Capital losses in year (X)
X
Less: Trading loss relief (sub to max amt) (X)
Less: Capital losses b/f (X)
Net Chargeable gains before annual exemption X
• The annual exemption is deducted after this relief and therefore a claim may
result in wasting the annual exemption.
• The two years available for potential claims are treated separately and thus a
claim is required for each year.
• A written claim is required in the same time period as for a claim against total
income (i.e. within one year of 31st January following the end of the tax year
of loss). For a 09/10 loss the claim must be made by 31st January 2012.

19
 iv. Relief for Trading Losses in the Opening Years
Automatic if no
Claim Made
a. Loss Relief in Opening Years ----------------à Carry Forward Relief
Optional
b.Loss Relief in Opening Years ----------------à Relief Against Total Income
Optional
c. Loss Relief in Opening Years ----------------à Special 3-year Carry Back
Optional Relief
d.Relief Against Total Income ----------------à Extended 3 Years Carry Back
Optional Against Trading Profits
e. Extended 3 Years Carry Back ----------------à Relief Against Chargeable
Remaining Loss Gains
f. b, c, d and e ----------------à Carry Forward Trading
Losses
• If, in the opening years, a loss has been taken into account in one tax year, it is
treated as nil when calculating the assessment for the next tax year.
a. Extended Carry Back Relief in Opening Years
• The extended relief claim is not possible in the first two years of business, and
is unlikely to be made in the third year.
• This is because the relief is against trading profits of the three years preceding
the year of the loss, when profits are likely to be minimal.
• The extended carry back is therefore unlikely to feature in opening year
questions.
b. Special Opening Year Loss Relief
• Optional claim
• Applies to loss arising in any of first 04 years of trading
• If claimed, set loss against
Ø Total income
Ø In 03 tax years before tax year of loss
Ø On a FIFO basis (i.e. earliest year first)
• There is no need for the trade to have been carried on in the earlier years
• One claim covers all 03 years
• For Example; loss in y/e 31.12.2009 (09/10) will be set off in:
Ø 06/07
Ø 07/08
Ø 08/09
• If claimed
Ø Must set off maximum amount possible
Ø Cannot restrict set-off to preserve the personal allowance
Ø Therefore, the benefit of the personal allowance may be wasted if a claim
is made
• Relief must be claimed in writing
• For 09/10 loss; the claim must be made by 31st January 2012.
v. Terminal Loss Relief
• The option to carry forward losses is not available as there will be no further
trading profits once the trade ceases.
• An extra option for terminal loss relief is available.

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• An additional option for incorporation relief is available if the business is
ceasing because it is being incorporated.
• If an individual makes a trading loss in the closing years, they therefore have
to initially decide whether to claim relief against total income (and then
possibly offset against gains).
• If there are remaining losses, the individual can claim terminal loss relief.
a. Loss Relief in Closing Years ----------------à Incorporation Relief Carry
Forward
b. Loss Relief in Closing Years ----------------à Terminal Loss Relief Carry
Optional Back Against Trading Profits
c. Loss Relief in Closing Years ----------------à Relief Against Total
Optional Income
d. Relief Against Total Income ----------------à Extended 3-Years Carry
Optional Back Against Trading Profits
e. Extended 3-Years Carry ----------------à Relief Against Chargeable
Back Against Trading Profits Gains
a. Terminal Loss Relief
• Optional claim
Ø However will normally be claimed
Ø Otherwise the benefit of the loss will be lost
• The relief is to set the terminal loss against trading income
Ø Of the last tax year (if any), and then
Ø Carry back three tax years
Ø On a LIFO basis
• The terminal loss is the loss of the last 12 months
• The relief must be claimed in writing
• For 09/10 loss, the claim must be made by 05th April 2014.
b. The Calculation of the Terminal Loss
• The terminal loss is the loss of the last 12 months of trading and is calculated
as follows:
Ø 06th April before cessation to the date of cessation
1. Actual trading loss in the period (ignore if profit) X
2. Overlap profits not yet relieved
12 months before cessation to 05th April before cessation
3. Actual trading loss in the period (ignore if profit) X
TERMINAL LOSS X
• Note that in the closing years, it is not compulsory to make a claim against
total income before claiming terminal loss relief.
c. Extended Carry Back Relief in Closing Years
• It is possible to claim the extended carry back relief in the closing years.
However it is unlikely to be beneficial.
• This is because the relief is the same as terminal loss relief (i.e. set off against
trading profits of the three years preceding the year of the loss) but with
terminal loss relief there is no 50,000 maximum restriction.
• In addition, terminal loss relief is available for the losses of the last 12 months
trading, not just the loss of the tax year.
2. Partnership
• Trading losses are allocated between partners in exactly the same way as
trading profits.

21
 a. Loss Relief Claims Available
• Claims available to partners are the same as those for sole traders.
• A partner joining a partnership may be entitled to claim opening year loss
relief, where a loss relief is incurred in the first four tax years of his
membership of the partnership. This relief would not be available to the
existing partners.
• A partner leaving the partnership may be entitled to claim for terminal loss
relief. Again, this relief would not be available to the partners remaining in the
partnership.
3. Limited Liability Partnerships (LLP)
• An LLP is a special type of partnership where the amount that each partner
contributes towards the partnership losses, debts and liabilities is limited by
agreement.
• It is generally taxed in the same way as all other partnerships.
• The normal loss reliefs are available.
• However, the losses that may be set against income not deriving from the
partnership are limited to the amount of capital that the partner has contributed
to the partnership.
4. Business Transferred to Companies
• When an unincorporated business ceases, the individual will seek to obtain
relief from any losses ASAP.
• They will therefore consider relief against total income and against chargeable
gains first, then claim terminal loss relief. Normally, if there are any
unrelieved losses remaining after these claims, the loss is lost.
• However, where the business is ceasing because it is being incorporated, these
unrelieved losses can be relieved against future income derived from the
company.
a. Incorporation Relief Against Future Income from the Company
• Incorporation relief is available where an unincorporated business
Ø Is transferred to the company
Ø ‘Wholly or mainly’ in exchange for shares, and
Ø The company is controlled by the former owner of the business.
• ‘Wholly or mainly’ is usually taken to mean that at least 80% of the
consideration received from the business from the company is in the form of
shares.
• The relief is to carry the losses forward
Ø Indefinitely
Ø Provided the owner retains the shares throughout the whole tax year in
which the loss relief is given, and
Ø Provided the company continues to carry on the trade of the former
unincorporated business.
• Losses are set against
Ø The first available income the individual derives form the company
Ø Set off against types of income from the company in any order
Ø Most beneficial order will be from employment income first, then savings
income and then dividends.
• Note that the losses cannot be set against the future profits of the company.

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 B. CAPITAL GAIN
A. Capital Gains Tax on Capital Gains
• Capital Gain Tax (CGT) is charged on gains arising on chargeable disposals of
chargeable assets by chargeable persons.
a. Badges of Trade
• Badges of trade are used to determine whether a transaction constitutes the
carrying on of a trade.
1. The Subject Matter of the Transaction:
• Trading is indicated where property does not yield an ongoing income or give
personal enjoyment to its owner.
2. The Length of Ownership:
• The sale of property within a short time of its acquisition is an indication of
trading.
3. Frequency of Similar Transactions:
• Trading is indicated by repeated transactions in the same subject matter.
4. Work Done on the Property:
• A trading motive is indicated where work is carried out to property to make it
more marketable, or where steps are taken to find purchasers.
5. Circumstances Responsible for the Realization:
• A forced sale to raise cash for an emergency indicates that the transaction is
not trading in nature.
6. Motive:
• If a transaction is undertaken with the motive of realizing a profit, this is a
strong indication of trading.
b. Chargeable Persons
• Chargeable persons include individuals and companies. We are concerned
with disposals by individuals.
• Only individuals who are either:
Ø UK resident or
Ø UK ordinarily resident
in the tax year in which the disposal takes place are subject to capital gains tax
on their gains.
• Chargeable individuals are subject to CGT on all disposals of assets,
regardless of where in the world the assets are situated.
• An individual who is neither UK resident nor UK ordinarily resident does not
pay UK CGT on any asset, not even those situated in the UK.
• The definition of residence and ordinary residence for CGT is the same as for
income tax purposes.
• An individual will be a UK resident in a tax year if he is physically present in
the UK for a period of six months or more.
• An individual’s ordinary residence is the place where the individual normally
resides as opposed to his place of occasional residence.
c. Chargeable Disposal
• Sale or gift of the whole or part of an asset
• Exchange of an asset
• Loss or total destruction of an asset
• Receipts of a capital sum derived from an asset, for e.g.
Ø Compensation received for damage to an asset
Ø Receipts for the surrender of rights to an asset.

23
d. Exempt Disposal
• Disposals as a result of the death of an individual
• Gifts to charities.
e. Chargeable Assets
• All forms of capital assets, wherever situated, are chargeable assets. E.g.
Ø Freehold land and buildings
Ø Goodwill
Ø Some types of leases
Ø Unquoted shares
Ø Quoted shares
Ø Certain types of chattels
f. Exempt Assets
• Exempt assets are outside the scope of CGT. Consequently, gains are not
taxable and losses are not allowable.
• Examples:
Ø Motor vehicles (including vintage cars)
Ø Main residence
Ø Cash
Ø Certain types of chattels
Ø Investments held within an ISA
Ø Qualifying Corporate Bonds (QCBs)
Ø Gilt-edged securities
Ø National Savings Certificates
Ø Foreign currency for private use
Ø Debtors
Ø Trading stock
Ø Prizes and betting winnings.
g. Calculation of Capital Gain/Loss on Individual Disposals
• An individual is subject to CGT on the total taxable gains arising on the
disposal of all assets in a tax year.
• Following are the steps for computing the chargeable gains tax payable by an
individual for a tax year:
1. Calculate the chargeable gains/allowable loss arising on the disposal of each
chargeable asset separately.
Ø Disposal proceeds X
Less: Allowable selling costs (X)
Net disposal proceeds X
Less: Allowable expenditure
Costs of acquisition X
Incidental costs of acquisition X
Additional (capital) enhancement expense X
(X)
Chargeable gain/(allowable loss) X
a. Net Disposal Proceeds
• The disposal proceeds used in the computation is normally the sale proceeds
received.
• If an asset is disposed of to a relative then sale proceeds is higher of:
i. Market Value
ii. Amount of sale proceeds

24
• However, market value may be used in certain circumstances instead of the
actual consideration.
• Market value is substituted for actual proceeds either because:
Ø The deal was not made at arm’s length (e.g. a gift)
Ø The law assumes that it was not made at arm’s length (e.g. transfers b/w
connected parties).
• An individual is connected with family members, business partners and
company that he controls. For this purpose family members are:
Ø Ancestors, sisters and their spouses/civil partners
Ø His or her spouse/civil partner
Ø The relatives (as above) of his or her spouse/civil partner.
b. Allowable Expenditure
• Incidental costs arising on disposal are deducted from the gross proceeds, e.g.
auctioneer’s fees, estate agent fees.
• Cost of acquisition (e.g. purchase cost)
• Expenditure on enhancing the value of the asset (improvement expenditure)
• Expenditure incurred to establish, preserve or defend the taxpayer’s title to the
asset
• We never consider any revenue expenditure while computing CGT.
• Renovation will be considered as capital expenditure in CGT.
• Incidental costs arising on the acquisition of the asset.
2. Calculate the net chargeable gains arising in the tax year = (chargeable gains
less allowable losses).
3. Deduct capital losses brought forward.
• Capital losses arising on assets in the current tax year are set off against
chargeable gains arising in the same tax year and to the maximum possible
extent (i.e. they cannot be restricted to avoid wasting all or part of the annual
exemption).
• Any unrelieved/unused capital losses are carried forward to offset against net
chargeable gains in future years.
• The maximum amount of brought forward losses that can be set off against
gains in any tax year is restricted to the amount required to reduce the total net
chargeable gains in the tax year to the level of the annual exemption.
4. Deduct the annual exemption = taxable gains = 10,100.
• Every individual is entitled to an annual exemption for each tax year
• For 09/10 the annual exemption is 10,100.
• If an individual’s taxable gains for the tax year are:
Ø ≤ 10,100; they are not chargeable to tax
Ø > 10,100; they are chargeable to tax on the excess
• If the annual exemption is not utilized in any particular tax year, then it is
wasted. It cannot be carried forwards or backwards against capital gains or
another tax year.
5. Calculate the CGT payable at a flat rate of 18%.
Ø Net chargeable gains for the tax year X
Less: Capital losses brought forward (X)
X
Less: Annual Exemption (10,100)
Taxable gains X
CGT payable (18% of Taxable gains) X

25
h. Payment of CGT
• CGT is due as follows:
Ø On 31st January following the tax year (i.e. for 09/10 payment must be
made by 31st January 2011).
Ø No payments on account are ever made.
• Where an individual acquires an asset where the previous owner was required
to use the asset’s market value in calculating their own gain (e.g. gift of an
asset) then that same market value is used by the current owner as their cost of
acquisition.
• Where an individual inherits an asset on death, the cost of acquisition when
they later dispose of the asset is the asset’s market value at the date of the
death (i.e. probate value).
• Taxable gain means the chargeable gains after deducting capital losses and the
annual exemption.
B. Special Rules for Calculation of Gain/Loss on Individual Disposals
• The basic pro forma for calculating gains on the disposals of assets is adapted
by special rules in the following circumstances:
a. Transfers b/w spouses and civil partners
b. Part disposals
c. Chattels and wasting assets
d. Assets lost or destroyed
e. Damaged assets
a. Transfers b/w Spouses and Civil Partners
• No gain or loss arises on the transfer
• Any actual proceeds are ignored
• The transferor is deemed to dispose of the asset at its acquisition cost
• The deemed proceeds of the transferor are treated as the deemed acquisition
cost of the transferee (i.e. the recipient spouse acquires the assets at its original
acquisition cost).
• The above rules only apply whilst the spouses/civil partners live together.
i. Subsequent Disposal by Transferee
• On a subsequent disposal by the transferred asset by the transferee, the
deemed acquisition cost (often referred to as the base cost of the asset) is the
original acquisition cost by the first spouse (i.e. deemed proceeds on the nil
gain, nil loss transfer).
ii. Planning Opportunities
• Married couples and civil partners can transfer assets between them at no tax
cost (i.e. the assets are transferred at no gain/no loss). This provides
opportunities to minimize their total capital gains tax liability.
• They can transfer assets b/w them to maximize the use of:
Ø Each individual’s annual exemption
Ø Capital losses.
b. Part Disposals
i. When there is a part disposal of an asset, we need to identify how much of the
original cost of the asset relates to the part of the asset disposed of.
ii. The allowable expenditure of the part of the asset disposed of is calculated using
the following formula:
Ø Original Cost × A/(A+B) = Allowable cost
Where:

26
 A = Value of the part disposed of
B = Market Value of the remainder at the time of the part disposal.
• The allowable expenditure, calculated using the formula, is then used in the
basic capital gains tax computation as normal.
c. Chattels and Wasting Assets
v CHATTELS
• Chattels are defined as tangible moveable property (e.g. a picture or table).
• Note that the asset must be:
Ø Moveable – therefore a building is not a chattel
Ø Tangible – therefore shares are not chattels.
i. Wasting Chattels
• The expected life not exceeding 50 years.
• Examples include; greyhound, boat, plant and machinery, racehorse.
• Plant and machinery is deemed to have a useful life of less than 50 years and
is therefore always a wasting chattel.
ii. Non-wasting Chattels
• The expected life is more than 50 years.
• Examples include; antiques, jewelry, paintings.
iii. Chattels – Exempt Disposals
a. WASTING CHATTELS
• Chattels eligible for capital allowances, e.g. plant and machinery used in a
business unless bought and sold for ≤ 6,000 (exempt).
b. NON-WASTING CHATTELS
• Chattels which are bought and sold for ≤ 6,000.
v WASTING ASSETS
• Wasting assets can be split into the following categories:
i. Chattels Not Eligible for Capital Allowances = Exempt From CGT:
ii. Chattels Eligible for Capital Allowances:
• Accordingly the following rules apply:
a. SOLD AT A GAIN
• Calculate the gain as normal, applying the 6,000 special rule if applicable.
b. SOLD AT A LOSS
• The capital loss is restricted as relief for the loss has already been given
through the capital allowances system.
• In the capital loss computation, the net capital allowances given (i.e. net of
balancing charges on disposal) are deducted from the asset’s allowable
expenditure.
• Plant and machinery sold at a loss, which is eligible for capital allowances,
results in a no gain/loss situation for capital gains tax purposes.
iii. Other Wasting Assets:
• This category covers wasting assets that are not chattels (e.g. copyright).
• The allowable expenditure on these assets is deemed to waste away over the
life of the asset, usually on a straight line basis.
• Consequently, when a disposal is made:
Ø The allowable expenditure is restricted to take account of the asset’s
natural fall in value.
Ø The asset’s fall in value is deemed to occur on a straight line basis over its
predictable useful life.
• The allowable cost is calculated as:

27
Ø C – (P/L × C)
Where,
P = the disposer’s period of ownership
L = the asset’s predictable life
C = the cost of the asset.
d. Assets Lost or Destroyed or Damaged
• The rules vary according to whether:
Ø The asset has been completely lost/destroyed or merely damaged
Ø The owner has replaced or restored the asset.
v ASSETS LOST OR DESTROYED
• Where an asset is lost/destroyed there is a deemed disposal for capital gains
tax purposes as follows:
i. No Insurance Proceeds
• Compute a capital loss using the normal CGT computation:
Ø Disposal proceeds will be nil.
Ø Deduction of the allowable expenditure will create a loss.
ii. Insurance Proceeds Received – No Replacement of Asset
• Where an asset is lost or destroyed and insurance proceeds are not used to
replace the asset, a chargeable gain/loss is computed using the normal capital
gains tax computation pro forma.
iii. Insurance Proceeds Received – Asset Replaced
• Where an asset is lost or destroyed and the insurance proceeds are used to buy
a replacement asset within 12 months the following rules apply:
Ø The tax payer can claim that the destruction/loss of the asset is treated as a
no gain/loss disposal (as for spouses transfer).
Ø If the insurance proceeds are greater than the deemed disposal proceeds
under the no gain/loss computation, the excess is deducted from the
replacement asset’s allowable cost.
• The date of disposal is the date that the insurance proceeds are received, not
when the destruction or loss of the asset occurred.
v ASSETS DAMAGED
• Where an asset is damaged there are no implications for capital gains tax
purposes unless compensation (e.g. insurance proceeds, is received).
• Where an asset is damaged and compensation is received there is a part
disposal for capital gains tax purposes. The allowable cost is calculated using
the normal part disposal formula:
Ø Cost × A/(A+B)
Where,
A = Compensation Received
B = Market Value of the remainder at the time of the part disposal.
The computation is varied depending on how the insurance proceeds are
applied.
i. Proceeds not Used in Restoration Work
• Normal part disposal capital gains computation is used. The value of the part
retained is the value of the asset in its damaged condition.
ii. Proceeds Fully Used in Restoration Work
• Where all of the insurance proceeds are used in restoring the asset the taxpayer
may claim to deduct the proceeds from the cost of the asset rather than be

28
 treated as having made a part disposal of the asset. This is a form of ‘roll-over
relief’.
C. Shares and Securities Special Rules
a. Government Securities and Qualifying Corporate Bonds
• All shares and securities disposed of by an individual are subject to capital
gains tax except for the following, which are exempt:
Ø Listed government securities (gilt-edged securities or gilts)
Ø Qualifying Corporate Bonds (e.g. debentures and company loan notes)
Ø Shares held in an Individual Savings Account (ISA).
i. Qualifying Corporate Bond
• A QCB is one that:
Ø Represents a normal commercial loan;
Ø Is expressed in sterling and has no provision for either conversion into, or
redemption in, any other currency; and
Ø Was issued after 13th March 1984 or was acquired by the disposer after
that date (whenever it was issued).
b. Valuation of Quoted Shares
• On a sale of shares b/w unconnected parties, the actual proceeds are used in
the capital gains computation.
• However it is necessary to identify the market value of quoted shares when
shares are either:
Ø Gifted
Ø Transferred to a connected party.
• Their market value is taken from prices quoted in the Stock Exchange Daily
Official List and is:
The lower of:
Ø The value using the ‘¼ up method’ (¼th of Bid Price)
i.e. lower quoted price + ¼ (higher price – lower price).
Ø The average of the highest and lowest recorded bargains
i.e. Average Bargain Price.
c. Identification Rules
• It is necessary to have identification (or matching) rules to determine which
shares have been disposed of as:
Ø Shares and securities that are bought in a particular company of the same
class are not distinguishable from one another.
Ø Each time shares are bought in any quoted company the price paid may be
different.
Ø They enable you to decide which shares have been sold and to work out
the allowable cot to use in the capital gains computation.
i. Identification Rules for Disposals by Individuals
• When shares are disposed of they are matched against shares acquired of the
same class in the following order:
I. Same day as the date of disposal.
II. Within following/next 30 days.
III. The share pool (shares acquired before the date of disposal are pooled
together).
a. The Share Pool
• The share pool is sometimes referred to as the ‘s104 pool’ or the ‘FA 1985
pool’.

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• For an individual, the share pool contains shares in the same company, of the
same class purchased before the date of disposal.
• The share pool simply keeps a record of the number of shares acquired and
sold and the cost of those shares.
• When shares are disposed of out of the share pool, the appropriate proportion
of the cost which relates to the shares disposed off is calculated. The shares
are disposed off at their average cost.
d. Calculating the Gain/Loss on the Disposal of Shares
• Once the identification rules have been used to identify which shares have
been disposed off, the cost of those shares is used in the normal chargeable
gains computation.
• If the individual disposes of shares in his personal trading company and is also
an employee of that company, Entrepreneurs’ relief is available.
e. Bonus Issues and Rights Issues
v BONUS ISSUES
• A bonus issue is the distribution of free shares to shareholders based on their
existing shareholding.
• For capital gains tax purposes they are treated as follows:
Ø For the purposes of the share identification rules the bonus shares acquired
will be included in the share pool.
Ø The bonus shares are not treated as a separate holding of shares.
Ø The number of shares are included in the pool, but at nil cost.
v RIGHTS ISSUES
• A rights issue is the offer of new shares to existing shareholders in proportion
to their existing shareholding, usually at a price below the market price.
• Rights issues are similar in concept of bonus issues, however because money
is paid for the new shares there are additional factors to consider:
Ø As for bonus issues, for the purposes of the share identification rules the
rights shares acquired will be included in the share pool.
Ø The rights shares are not treated as a separate holding of shares.
Ø A number of shares are included in the pool, and the cost, in the same way
as a normal purchase.
f. Reorganizations and Takeovers
v REORGANISATIONS
• Reorganization involves the exchange of existing shares in a company for
other shares of another class in the same company.
v TAKEOVERS
• A takeover occurs when one company acquires the shares in another company
either in exchange for shares in itself, cash or a mixture of both.
i. Consideration: Shares for Shares
• Where the consideration for the reorganization or takeover only involves the
issue of shares in the acquiring company, the tax consequences are:
Ø No capital gains tax is charged at the time of the reorganization/takeover.
Ø The cost of the original shares becomes the cost of the new shares.
Ø Where the shareholder receives more than one type of share in exchange
for the original shares, the cost of the original shares is allocated to the
new shares by reference to the market values of the various new shares on
the first day of dealing in them. This treatment is automatic.

30
 Ø However, the shareholder can elect for the event to be treated as a disposal
for CGT purposes.
Ø If the election is made, Entrepreneur’s relief may be available against the
gain.
ii. Takeovers: Consideration in Cash and Shares
• If the consideration for the takeover includes a cash element, then:
Ø There is a part disposal of the original shares.
Ø A gain arises on the cash element of the consideration on the date the cash
is received.
iii. Cash Proceeds: Part Disposal Computation
• In these circumstances the part of the cost of the original holding apportioned
to the cash is calculated as:
Ø Cash Received × Cost of Original Shares
Cash Received + M.V. of New Shares
D. Capital Gains Tax Reliefs For Individuals
• In certain situations a gain on the disposal of an asset may be reduced or
delayed by capital gains tax reliefs. The reliefs are deducted from the gain
before deducting capital losses.
• The main reliefs available to individuals are as follows:
Relief Available on:
Non-
Principal private
business Individual's private residence
residence relief
assets
Entrepreneur's Exemption on the disposal of
relief certain business assets
Reinvestment in new business
Business Roll-over relief
assets
assets
Hold-over relief Gift of business assets
Incorporation
The incorporation of a business
relief
I. Principal Private Residence Relief
• Principal private residence (PPR) relief applies when an individual disposes
of:
Ø A dwelling house (including normally up to half an acre of adjoining land)
Ø Which has at some time during his ownership been his only or main
private residence.
a. The Relief
• The relief applies where the PPR has been occupied for either the whole or
part of the period of ownership.
b. Calculating the Relief
• Where there has been a period of absence from the PPR the procedure is as
follows:
1. Calculate the gain on the disposal of the property
2. Compute the total period of ownership
3. Calculate the periods of occupation
i. Periods of Occupation
• The period of occupation includes period of both:
Ø Actual occupation
Ø Deemed occupation.

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 ii. Deemed Occupation
• Periods of deemed occupation are:
01. The last 03 years of ownership
02. Up to 03 years of absence for any reason
03. Any period spent working abroad
04. Up to 04 years of absence while working in the UK.
• The absences in (02) to (04) must be prepared and followed by a period of
actual occupation.
• The condition to reoccupy the property after the period of absence does not
need to be satisfied for (03) and (04) above where an employer requires the
individual to work elsewhere immediately, thus making it impossible to
resume occupation.
4. Calculate the PPR relief as follows:
Ø Gain × (Periods of occupation/Total period of ownership)
5. Deduct the PPR relief from the gain on the property.
c. Business Use
• Where a house, or part of it, is used wholly and exclusively for business
purposes, this part loses its PPR relief and becomes taxable.
• It should be noted that:
Ø The taxpayer cannot benefit from the rules of deemed occupation for any
part of the property used for business purposes.
Ø However where part of the property was used for business purposes but
was also at any time used as the taxpayer’s main residence, the exemption
for the last 36 months applies to the whole property.
Ø The 36 months exemption does not however apply to any part of the
property used for business purposes throughout the period of ownership.
d. Letting Relief
• Letting relief is available where an individual’s PPR is let out for residential
use.
• It applies when:
Ø The owner is absent from the property and lets the house out, or
Ø The owner lets part of the property whilst still occupying the remainder.
• It does not apply to let property which is not the owner’s PPR (e.g. buy-to-let
properties).
• Letting relief is the lowest of:
Ø 40,000
Ø The amount of the gain exempted by the normal PPR rules
Ø The part of the gain (still in charge) attributable to the letting period.
II. Entrepreneur’s Relief
• This relief reduces the capital gains tax payable on certain qualifying business
disposals.
• The relief operates as follows:
Ø The first 01 million of gains on ‘qualifying business disposals’ will be
reduced by 4/9ths.
Ø The remaining 5/9ths are taxed at 18%, resulting in an effective rate of 10%
on the first 01 million of gains (18% × 5/9 = 10%).
Ø Any gains above the 01 million limits are taxed in full at the 18% rate.
• The relief is given before the deduction of:

32
 Ø Allowable losses (other than any losses on assets that are part of the
disposal of the business), and
Ø The annual exemption.
• The relief must be claimed within 12 months of the 31st January following the
end of the tax year in which the disposal is made.
• For 09/10 disposals, the relief must be claimed by 31st January 2012.
• The 01 million limit is a lifetime limit which is diminished each time a claim
for the relief is made.
a. Qualifying Business Disposals
• The relief applies to the disposal of:
Ø The whole or part of a business carried on by the individual either alone or
in partnership
Ø Assets of the individual’s or partnership’s trading business that has now
ceased
Ø Shares provided:
§ The shares are in the individual’s ‘personal (unquoted) trading company’,
and
§ The individual is an employee of the company (part time or full time).
• An individual’s personal trading company is one in which the individual:
Ø Owns at least 05% of the ordinary shares
Ø Which carry at least 05% of the voting rights.
• Note that:
Ø The disposal of an individual business asset used for the purposes of a
continuing trade does not qualify. There must be a disposal of the whole or
part of the trading business. The sale of an asset in isolation will not
qualify.
Ø “Part of a business” is likely to be interpreted as meaning a “substantial
part” which is “capable of independent operation”.
Ø Where the disposal is a disposal of assets (i.e. not shares), relief is not
available on gains arising from the disposal of those assets held for
investment purposes.
b. Qualifying Ownership Period
• The asset(s) being disposed of must have been owned by the individual
making the disposal in the 12 months prior to the disposal.
• Where the disposal is an asset of the individual’s or partnership’s trading
business that has now ceased the disposal must also take place within 03 years
of the cessation of trade.
c. Interaction with Reliefs
• Note that other specific capital gains tax reliefs (e.g. gift relief, roll-over relief
and incorporation relief) are given before Entrepreneur’s relief.
• However, the interaction of Entrepreneurs’ relief with other reliefs will not be
examined.
• Where relevant, a question will state that a particular relief is not available.
d. Interaction with Takeovers
• With a share for exchange, it is possible that:
Ø The old shares would qualify for Entrepreneurs’ relief if it were treated as
a disposal.
Ø But the new company is not the shareholder’s personal trading company
and so the later disposal of its shares would not qualify for relief.

33
 In this case, the shareholder can elect for the share exchange event to be
treated as a disposal for CGT purposes such that Entrepreneurs’ relief may be
available against the gain.
III. Replacement of Business Asset Relief (Roll-over Relief)
• Roll-over relief allows the gain arising on the disposal of a qualifying business
asset to be rolled over (i.e. deferred) when the sale proceeds are reinvested in a
new qualifying business asset.
• This relief is available to both companies and individuals.
a. The Relief
• The gain arising on the disposal of the qualifying business asset is deducted
from (rolled over against) the acquisition cost of the new asset.
• Provided the proceeds are fully reinvested, no tax is payable at the time of the
disposal.
• Roll-over relief effectively increases the gain arising on the disposal of the
replacement asset, as its base cost has been reduced by the amount of the
deferred gain.
• Gains may be ‘rolled over’ a number of times such that a tax liability will only
arise when there is a disposal without replacement.
• The relief is not automatic, it must be claimed.
• An individual must claim the relief within 04 years from the end of the tax
year in which the disposal is made.
• A disposal in 09/10 would require a claim by 05th April 2014.
b. Conditions
• Where a qualifying business asset is sold at a gain, the taxpayer may roll over
the gain provided the proceeds are reinvested in a replacement qualifying
business asset within the qualifying time period.
c. Qualifying Business Assets
• The main categories of assets qualifying for roll-over relief on a disposal by an
individual are:
Ø Goodwill
Ø Land and buildings
Ø Fixed plant and machinery (i.e. not movable).
• Both the old and the replacement assets must be qualifying business assets and
have been used in a trade.
d. Qualifying Time Period
• The replacement assets must be acquired within a period beginning 01 year
before and ending 03 years after the date of sale of the old asset.
e. Partial Reinvestment of Proceeds
• Full roll-over relief is only available when all of the proceeds from the sale of
the old asset are reinvested.
• Where there is partial reinvestment of the proceeds, part of the gain is
chargeable at the time of the disposal.
• The gain which is chargeable (cannot be rolled over) is the lower of:
Ø The amount of the proceeds not reinvested
Ø The full gain.
• Due to partial reinvestment, roll over relief will be reduced by the diff of:
Ø Sale proceeds – Cost of new asset
f. Non-business Use

34
• Full roll-over relief is only available where the asset being replaced (the old
asset) was used entirely for trade purposes throughout the trader’s period of
ownership.
• Where this condition is not met, roll-over relief is still available but it is scaled
down in proportion to non-trade use.
g. Depreciating Assets
• Roll-over relief is modified where the new asset is a depreciating asset:
Ø If the replacement asset acquired is a depreciating asset, the gain cannot be
rolled over, instead it is deferred until the earliest of the following three
events:
§ Disposal of replacement asset.
§ The depreciating asset ceases to be used for the purpose of the trade.
§ Ten years from the date of acquisition of the replacement asset.
Ø The deferred gain is not deducted from the cost of the new asset.
Ø The deferred gain is just ‘frozen’ and becomes chargeable on the earliest
of the three events above.
• A depreciating asset is a wasting asset, or an asset that will become a wasting
asset within ten years, (e.g. fixed plant and machinery or leasehold property
with ≤ 60 years remaining on the lease).
• If prior to the deferred gain crystallizing, a non-depreciating asset is bought,
then the original deferred gain can now be rolled over.
IV. Gift of Business Assets – Hold-over Relief
• The gift of an asset is a chargeable disposal which gives rise to a capital gains
tax liability for the donor, however the donor has not received any funds with
which to pay the tax.
• Gift relief allows the gain arising on the gift of qualifying business assets to be
held over (i.e. deferred) until the asset is eventually sold by the donee.
• The relief however is only available for:
Ø Qualifying business assets
Ø Gifted by individuals.
a. The Relief
• The relief operates as follows:
• Both the donor and donee must claim the relief.
• For 09/10 gifts, the claim must be made by 05th April 2014 (i.e. within four
years from the end of the tax year in which the gift was made).
• On the subsequent sale of the asset by the donee, the base cost is compared
with the sale proceeds received to calculate the chargeable gain.
i. Donor
• Normal capital gain is calculated using the market value as proceeds
• The gain is not chargeable but is deducted from the base cost of the asset
acquired by the donee.
ii. Donee
• The gain accruing to the donor is deducted from the acquisition cost.
Ø Acquisition cost = Deemed to be market value.
b. Qualifying Assets
• Following are the main categories of qualifying asset.
Ø Assets used in the trade of:
§ The donor (i.e. where he is a sole trader)

35
 § The donor’s personal company (this extends the relief to assets owned by
the individual but used in the company by him directly for trading
purposes).
Ø Unquoted shares and securities of any trading company.
Ø Quoted shares or securities of the individual donor’s personal trading
company.
• A company qualifies as an individual’s personal trading company if at least
05% of the voting rights are owned by the individual.
• Note that, if applicable, gift relief is given before Entrepreneurs’ relief.
However, the interaction of Entrepreneurs’ relief with other reliefs will not be
examined.
• Note, however, that:
Ø The donor may choose not to claim gift relief in order to crystallize a gain
and claim Entrepreneurs’ relief instead if this is advantageous (i.e. satisfy
the one-year ownership rule).
Ø The donee may be able to make his or her own claim to Entrepreneurs’
relief on a subsequent disposal if the conditions are satisfied.
c. Sales at an Undervalue
• The relief applies not just to outright gifts but also to sales at an undervalue,
where there is an element of gift.
• For sales at an undervalue the relief is modified as follows:
Ø Any proceeds received which exceed the original cost of the asset gifted
are chargeable to capital gains tax at the date of the gift.
Ø The gain held over is reduced by the amount chargeable.
d. Assets Not Used Wholly for Trade Purposes
• The relief is restricted either:
Ø Only part of an asset is used for trading purposes
Ø An asset is used for trading purposes for only part of the donor’s period of
ownership.
e. Assets Apart from Shares
• Only the gain relating to the period that the asset was used in the trade or the
part of the asset used for trading purposes is eligible for relief.
• The restriction to the relief operates in the same way as roll-over relief where
assets have not been wholly used in the trade.
f. Shares
• Where the assets being gifted are shares the gain eligible to be held over is
restricted in the following situation:
Ø The shares are in the donor’s personal trading company (at least 50% of
the voting rights are owned by the donor) whether quoted or unquoted; and
Ø The company owns chargeable non-business assets.
In this situation, the gain eligible for gift relief is:
Ø Total gain × M.V. of chargeable Business Assets (CBA)
M.V. of Chargeable Assets (CA
• Note that where the donor hold less than 05% of the voting rights:
Ø For unquoted shares – no restriction to the relief when shares are gifted
Ø For quoted shares – gift relief is not available at all.
i. Chargeable Assets
• A chargeable asset is one that, if sold, would give rise to a chargeable gain or
loss. Exempt assets such as motor cars are therefore excluded. Stocks, debtors,

36
 cash, etc. are also excluded as they are not capital assets and therefore not
chargeable.
ii. Chargeable Business Assets
• These are defines as chargeable assets (as above) that are used for the
purposes of a trade. Chargeable business assets therefore exclude shares,
securities or other assets owned by the business but held for investment
purposes.
• Note that if the individual disposes of shares in a personal trading company:
Ø Gift relief is available:
§ Subject to the (CBA/CA) restriction above
§ Regardless of whether or not the individual works for the company
Ø Entrepreneurs’ relief is also available provided:
§ The individual works for the company, and
§ It has been the individual’s personal trading company
§ For the 12 months prior to the disposal.
• Remember that the interaction of the two reliefs will not be examined;
however, the donor may choose to not claim gift relief in order to claim
Entrepreneurs’ relief.
V. Incorporation Relief
• Where an individual transfers their business to a company, the individual
assets of the business are deemed to have been disposed of at market value for
capital gains tax purposes.
• Incorporation relief is a form of roll-over relief to allow the gains arising on
incorporation to be deferred until the shares in the newly formed company are
disposed of.
a. The Conditions
• Incorporation relief is available where the following conditions apply:
Ø The unincorporated business is transferred as a going concern.
Ø All of the assets of the business (other than cash) are transferred.
Ø The consideration for the transfer of the business must be wholly or mainly
shares in the company.
b. The Relief
• The net chargeable gains arising on the deemed disposal of the individual
assets are rolled over against the acquisition cost of the shares in the new
company.
• The rolled over gain is deducted from the base cost of the shares.
• Where the consideration for the transfer of the business to the company is
wholly shares, the full gain is rolled over.
• Where part of the consideration for the transfer of the business is not shares,
e.g. cash or debentures, the gain eligible for relief is:
Ø Net chargeable gains × Value of shares issued
Total consideration
• The relief is automatic provided certain conditions are met.
• An individual can elect for incorporation relief not to apply (i.e. dis-apply the
relief).
• Note that, if applicable, incorporation relief is given before Entrepreneurs’
relief. Therefore, where part of the consideration is in the form of cash, the
remaining gain can be reduced by Entrepreneurs’ relief. However, the
interaction of the reliefs will not be examined.

37
• It is important to note that:
Ø The subsequent disposal of the shares should normally qualify for
Entrepreneurs’ relief provided the conditions are satisfied.
Ø However, if this is unlikely, the individual may dis-apply incorporation
relief in order to crystallize a gain and claim Entrepreneurs’ relief instead
if this is advantageous (i.e. if the individual plans to dispose of the shares
within one year and fails the one-year ownership rule).
E. Chargeable Gains for Companies
• Companies pay corporation tax on their chargeable gains and not capital gains
tax.
• Any chargeable gains that a company makes during an accounting period are
included in the PCTCT computation.
1. Calculation of Chargeable Gains for a Company
• The following steps should be carried out to compute the chargeable gains to
be included in a company’s PCTCT computation:
1) Calculate the chargeable gains/allowable losses arising on the disposal of
each chargeable asset separately
2) Calculate the total net chargeable gains arising in the accounting period =
(chargeable gains less allowable losses)
3) Deduct capital losses brought forward = total net chargeable gains
4) Include in PCTCT computation.
a. Proforma – Companies
Ø Disposal proceeds X
Less: Incidental disposal costs (X)
Net proceeds X
Less: Allowable expenditure (as for individuals) (X)
Unindexed gain X
Less: Indexation allowance (X)
Chargeable gain/(allowable loss) X
• There is no annual exemption available to companies; the net chargeable gains
are included in the PCTCT computation.
b. Indexation Allowance
• The indexation allowance (IA) gives a company some allowance for the
effects of inflation in calculating a gain.
• The aim is to ensure that the capital gains subject to tax represent the true
increase in capital value in real terms.
• The rules for the IA are as follows:
• This is only for companies.
Ø The IA is based on the cost of the asset and the movement in the retail
price index
Ø It is available:
§ From the month of purchase
§ To the month of disposal
Ø The IA is calculated separately for each item of expenditure (e.g. calculate
a different IA for the original acquisition cost and any enhancement
expenditure because they have different purchase dates).
Ø The IA cannot create or increase a capital loss.
c. Calculation of the Indexation Allowance
• The indexation factor must be rounded to 03 decimal places.

38
• RPI is Retail Price Index
• The IA is calculated as follows:
Ø IA = (indexation factor × allowable cost)
• The indexation factor is calculated as follows:
Ø RPI in month of disposal – RPI in month of expenditure
RPI in month of expenditure
• If there is a fall in the RPI between the month of purchase and the month of
disposal, the indexation allowance in relation to that expenditure is nil.
2. Capital Losses
• A capital loss arises if the proceeds received for an asset, are lower than the
allowable expenditure.
a. Utilization of a Capital Loss
• Where allowable losses arise, they are set off against chargeable gains arising
in the same accounting period.
• Any loss remaining is carried forward against chargeable gains of future
accounting periods, as soon as they arise.
• Capital losses can not be set-off against any other income of a company.
b. Shares and Securities
• The issues regarding the disposal of shares by a company are similar to those
set out for disposals by individuals.
• Shares and securities present a particular problem for capital gains
computations, because any two shares in a company (of a particular class) are
indistinguishable.
• Matching rules are therefore needed, to solve the problem of being unable to
identify acquisitions with disposals. They apply, when there has been more
than one purchase of shares or securities, of the same class in the same
company.
c. Matching Rules
• For a company, disposals are matched against acquisitions in the following
order:
i. Shares acquired on the same day (as the sale).
ii. Shares acquired during the nine days before the sale.
iii. Shares in the share pool.
• For (i) and (ii), there will be no effect of indexation allowance.
d. Calculation of Gains on Same Day and Previous 09 Day Purchases
Ø Sale proceeds X
Less: Allowable cost (X)
Chargeable gain X
e. Calculation of Gains on Share Pool
• Share pool contains shares in the company, of the same class, purchased up to
09 days before the date of disposal.
• The pool keeps a record of the:
Ø Number of shares acquired and sold
Ø Cost of the shares, and
Ø Indexed cost of the shares (i.e. cost plus indexation allowance).
• Each purchase and sale is recorded in the pool, but the indexed cost must be
updated before recording the “operative event (cash is involved, e.g. Right
issue)”.

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• When calculating the IA in the share pool, the indexation factor is not rounded
to 03 decimal places.
• When shares are disposed of out of the share pool, the appropriate proportion
of the cost and indexed cost which relates to the shares disposed of is
calculated on an average basis (as for individuals).
f. Pro forma for a Company’s Share Pool
• The following pro forma, should be used to ensure that additions to and
disposals from the share pool, are correctly dealt with.
Number Cost Indexed Cost
Ø Purchase X X ---------à X
IA to next operative event X
Purchase X X ---------à X
X X X
IA to next operative event X
Disposal (X) (X) (X)
W1 W2
Pool carried forward X X X
W1: Calculates the average pool cost of shares disposed of
W2: calculates the average indexed cost of shares disposed of
Workings 1 and 2 then feed into a normal gain computation, as follows:
Ø Sale proceeds X
Less: Cost (W1) (X)
Unindexed gain X
Less: Indexation allowance (W2 – W1) (X)
Chargeable gain X
3. Bonus and Rights Issues
• The shareholder is making new acquisition of shares in both the issues.
• However, for matching purposes, such acquisitions arise out of the original
holdings. They are not treated as a separate holding of shares.
v BONUS ISSUES
• As a bonus issue is free shares, there is no indexation to be calculated.
• A bonus issue is not an operative event in the share pool.
• Simply, add the bonus issue shares to the share pool. When the next operative
event occurs (e.g. next sale or purchase), index from the operative event
before the date of the bonus issue.
v RIGHTS ISSUE
• A rights issue should be treated as an operative event, in the same way as a
purchase in the share pool:
Ø Index up to the date of the rights issue; then
Ø Add in the number of shares and their cost.
4. Takeovers/Reorganizations
a. Consideration: Shares for Shares
• Where the consideration for the reorganization or takeover, only involves the
issue of shares in the acquiring company, the tax consequences are:
Ø No chargeable gain arises at the time of the reorganization or takeover.
Ø The cost of the original shares becomes the cost of the new shares.
Ø Where the shareholder receives more than one type of share, in exchange
for the original shares, the cost of the original shares is allocated to the

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 new shares, by reference to the market values of the various new shares,
on the first day of dealing in them.
b. Mixed Consideration
• When both cash and shares are received on a takeover:
Ø There is a part disposal of the original shares. A chargeable gain arises on
the cash element of the consideration.
5. Reliefs Available to Companies
• The only capital gains relief available to companies is Roll-over relief.
• Goodwill is not a qualifying asset for companies.
• The gain deferred is the ‘indexed gain’ (i.e. the gain after IA).
a. Summary of Roll-over Relief
• Roll-over relief exists to allow companies to replace assets used in their trade,
without incurring a corporation tax liability on the related chargeable gains.
• The gain arising on the disposal of the business asset, is deducted form (rolled
over against), the acquisition cost of the new asset.
• Provided the proceeds are fully reinvested, no tax is payable at the time of the
disposal.
• The most common assets which qualify for roll-over relief are:
Ø Land and buildings that are both occupied and used for trading purposes.
Ø Fixed plant and machinery (here ‘Fixed’ means immovable)
• The acquisition of the replacement asset must occur during a period that
begins 01 year before the sale of the old asset and ends 03 years after the sale.
• Where disposal proceeds of the old asset are not fully reinvested the surplus
retained reduces the amount of chargeable gain that can be rolled over.
• When an asset has not been used entirely for business purposes throughout the
company’s period of ownership, the roll-over relief is scaled down in
proportion to the non-business use.
• If reinvestment is in a depreciating asset, the capital gain is deferred until the
earliest of:
Ø Disposal of the depreciating asset
Ø Depreciating asset ceases to be used for trading purposes
Ø 10 years since the asset was acquired.
• Any asset with a predictable life of not more than 60 years is a depreciating
asset.
• If a new non-depreciating asset is acquired before the deferred gain becomes
chargeable, roll-over relief can be reinstated.

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