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HMRC internal manual

Capital Gains Manual

Capital allowances: part-disposals

TCGA92/S42(3) & (4)

TCGA92/S42(3) & (4) will apply on the part disposal of an asset, where the expenditure on the asset has qualified for any capital allowance or renewals allowance.  Any apportionment required by section 42 is to be made before operating the loss restriction in TCGA92/S41 (see CG15410).

Any loss accruing on a subsequent disposal or part-disposal of the asset is restricted to the extent that any capital allowance or renewal allowance has not already been used to restrict an earlier loss.

Example

In 2011, Ms H acquires enterprise resource planning software for £50,000, which qualifies for capital allowances.  Ms H is able to grant a licence for one other person to use the software.

In 2014, Ms H grants a licence to Mr A to use the software for 5 years for £30,000.  TCGA92/22(1) treats the capital sum received for the grant of licence as a part disposal of the software (CG12945).

The market value of the software after the licence has been granted is £10,000.

The fraction of the expenditure which is allowable as a deduction in the computation of the loss accruing on the part-disposal is:

 

A = ___30,000___ = 3/4
     
 A + B      30,000 + 10,000  

 

The computation of the loss is:

    £
     
Disposal proceeds      30,000
less Cost 3/4 x 50,000 (37,500)
Loss      (7,500)

 

As the computation results in a loss, we must restrict the allowable expenditure on the asset by the capital allowances which have been or may be made.  In this case, there is no balancing charge.  The capital allowances that may be made are £50,000 so the allowable expenditure on the asset is restricted.  The revised computation is:

    £
     
Disposal proceeds      30,000
less Cost 3/4 x 50,000 – 7,500 (30,000)
Loss             (0)

 

Section 41 cannot turn a loss into a gain so the loss is restricted to NIL.

There remains £42,500 of capital allowances that have been or may be made.  If there is a loss on a later disposal or part disposal of the asset, then this loss may also be restricted under section 41.  A record should be kept of the amount of capital allowances that were used in restricting the loss from each disposal, so that this can be taken into account in any subsequent disposal.