Introduction and computation: computation: cash basis for small businesses - capital gains aspects: exemption for disposals by persons using the cash basis
This guidance applies to trades where a cash basis election under ITTOIA05/S25A is, or has been, in place. The main guidance on these trades can be found at BIM70000+.
When a cash basis election is first made, any capital allowances pool balance is written off (BIM70067) and capital allowances are not available while a cash basis election is in force.
Wasting chattels are normally exempt from capital gains tax (CG76721). However, this exemption does not apply when the asset has been used for the purposes of a trade, profession or vocation carried on by the person making the disposal and capital allowances were, or could have been, claimed (CG15445). Without a special rule, an asset used in a cash basis trade but on which capital allowances had been claimed before the cash basis election was made would not be exempt for capital gains purposes. The result would be that a gain could be taxed twice: once under the capital gains tax rules and once under the income tax rules.
Exemption for disposals by persons using the cash basis - TCGA92/S47A
To avoid this double taxation, TCGA92/S47A aligns the capital gains position of wasting chattels under the cash basis election with the general exemption for wasting chattels.
To ensure that the exemption applies only when any gain or loss is part of the cash basis profit/loss for income tax purposes, certain conditions must be satisfied.
Capital gains tax exemption: conditions to be satisfied
All of conditions A to D must be satisfied.
- Condition A. The asset is tangible, moveable property (a chattel, see CG76550) and is a wasting asset (CG76700).
- Condition B. The asset has, at any time during their period of ownership, been used for the purposes of a trade, profession or vocation carried on by the person making the disposal.
- Condition C. A cash basis election has effect for that trade, profession or vocation at the time of the disposal.
- Condition D. Any of the expenditure deductible in the capital gains computation (TCGA92/S38, CG15150+) was brought into account in the cash basis calculation of the profits of the trade, profession or vocation, or would have been so brought into account had a cash basis election been in place when the expenditure was paid.
Partial trade use - TCGA92/S47A(6) and (7)
If the asset was used only partially in the trade, profession or vocation, or used in it for only a part of the period of ownership, the rules in TCGA92/S47A subsections (6) and (7) provide that the exemption in this section applies to the part of the gain apportioned to the trade use. Conditions A to D above must be satisfied.
The apportionment of consideration and expenditure are made to the extent that the expenditure deductible in the capital gains computation (TCGA92/S38, CG15150+) was brought into account in the cash basis calculation of the profits of the trade, profession or vocation, or would have been so brought into account had a cash basis election been in place when the expenditure was paid.
In practice, there should never be a need to calculate the apportioned gain as the portion of the gain not exempted by this provision (i.e. the portion relating to the non-trade use) will fall to be exempt under the general exemption for wasting chattels at TCGA92/S45(1).
Under this section there is no distinction between assets which originally qualified for capital allowances when acquired and those acquired in a period to which the cash basis election applied. This means that you do not need to know whether a particular asset had qualified for capital allowances before the cash basis election was made.
For examples see CG15490.