CG15485 - introduction and computation: computation: cash basis for small businesses - capital gains aspects: disposals made by persons after leaving the cash basis
Conditions which must be satisfied for the rules in TCGA92/S47B to apply
Amount deducted in cash basis deductible for capital gains - TCGA92/S47B(4)
Restriction of losses as though by reference to capital allowances - TCGA92/S47B(5)
Alignment with rules for wasting assets qualifying for capital allowances - TCGA92/S47B(6)
Interaction with cash basis rules for change in non-business use
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 BIM70000P.
Where an asset to which these rules apply (CG15475) was acquired by an individual and used in a trade in respect of which a cash basis election was in force, a revenue deduction will have been taken for income tax purposes for the money paid on acquisition of the asset (BIM70035). If the cash basis election later ceases to be in force, the cost of the asset will have been allocated to the capital allowances pool (BIM70073) and the disposal proceeds will be dealt with for income tax purposes through that pool (CA23250).
TCGA92/S47B treats such assets for capital gains tax purposes as though they had always qualified for capital allowances, aligning their treatment for capital gains purpose with that of otherwise identical assets used in a trade, profession or vocation which has never been subject to a cash basis election (CG15400).
Conditions which must be satisfied for the rules in TCGA92/S47B to apply
The section applies to a disposal where the asset has been used for the purposes of a trade, profession or vocation carried on by the person making the disposal, when both conditions A and B are satisfied.
- Condition A. Expenditure on the asset was incurred at a time that a cash basis election was in force in that trade, profession or vocation and that expenditure was brought into account in calculating its cash basis profits.
- Condition B. At the time of disposal there is no cash basis election in force in relation to that trade, profession or vocation.
Amount deducted in cash basis deductible for capital gains - TCGA92/S47B(4)
Normally, if a sum is deductible in calculating taxable income it is not deductible in the capital gain computation (CG14300). This rule does not apply to an asset to which this section applies.
This means that a deduction is available in the capital gains tax computation for the cost of the asset just as it would have been if the asset had qualified for capital allowances when acquired.
Restriction of losses as though by reference to capital allowances - TCGA92/S47B(5)
Normally, capital losses are restricted in situations where tax relief for a fall in value is given through capital allowances (TCGA92/S41, CG15410). This rule also applies to assets to which this section applies, which are treated as though they had qualified for capital allowances when acquired. In other words, for such assets the calculation is carried out as though the cash basis election had never been made.
Alignment with rules for wasting assets qualifying for capital allowances - TCGA92/S47B(6)
This brings the capital gains treatment of these assets into line with the normal capital gains tax rules for wasting assets qualifying for capital allowances (CG15440). It does this by treating them on disposal as though the cash basis election had not been in force when they were acquired, i.e. as though the expenditure had, instead, qualified for capital allowances.
Interaction with cash basis rules for change in non-business use
Under the cash basis, an increase in non-business use of an asset gives rise to an income tax charge (BIM70020) based on the market value of the asset at the time of that increase. This is treated as a part-disposal for cash basis purposes but is not a disposal for capital gains purposes because there is no disposal of the asset. This income tax charge is ignored in the capital gains tax calculation on the eventual disposal of the asset: there is no deduction given for it and the gain is calculated according to the rules for wasting assets qualifying for capital allowances (CG15445).
Similarly, where business use of the asset ceased, without disposal, during the period of the cash basis election and an amount was brought into account for income tax (BIM70020), this amount is ignored for capital gains tax purposes. There is no deduction given for it and the gain is calculated according to the rules for wasting assets qualifying for capital allowances (CG15445).
Note
This section applies to all assets (other than cars) which would qualify for plant & machinery allowances (BIM70035), not just to chattels. These assets are wasting assets (CG15440).
For examples see CG15490.