HMRC internal manual

Capital Gains Manual

Expenditure: enhancement expenditure: assets merged, divided etc

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.


Assets may be merged or divided or may change their nature. Or rights or interests in or over assets may be created or extinguished. As a result of these changes, the value of an asset disposed of may derive from some other asset in the same ownership. In such circumstances, in determining the appropriate expenditure to be allowed as a deduction in computing the gain on the disposal, you should trace the allowable expenditure on any asset or assets from which the asset disposed of is `derived’ through the various changes. You should allow an appropriate proportion of the allowable expenditure which falls within paragraph (a) and (b) of TCGA92/S38 (1).

There is some guidance in case law on whether an asset derives from other assets.

  • In Aberdeen Construction Group Ltd v CIR 52TC281, the release of a loan debt due by a company to a shareholder caused the shareholding to increase in value. But it was held that the conditions of what is now TCGA92/S43 were not satisfied, since the loan was not merged with the shares.
  • In Bayley v Rogers 53TC420, it was held that what is now TCGA92/S43 did not apply where, following the expiry of a lease of business premises, the tenant was granted a new lease by order of a Court.

As regards the merger of short leaseholds into freeholds or long leases or short head leases, see CG71400+.