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HMRC internal manual

Capital Gains Manual

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Introduction and computation: computation: cash basis for small businesses - capital gains aspects: examples

Example 1 - Cash basis election applies throughout period of ownership
Example 2 - Cash basis election made after asset began to be used in trade
Example 3 - Cash basis election ceased before asset disposed: gain
Example 4 - Cash basis election ceased before asset disposed: loss

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.

Example 1 - Cash basis election applies throughout period of ownership

Mr A purchased an item of plant for use in his trade on 1 July 2013 for £40,000. He sold it on 30 June 2015 for £30,000, having used it exclusively and continuously in his trade throughout his period of ownership. A cash basis election applied to the trade and the asset satisfied condition A of TCGA92/S47A.

Income tax relief for the loss was given through the cash basis by way of an immediate deduction for the £40,000 paid on 1 July 2013 and inclusion of the £30,000 receipt on 30 June 2015.

As a cash basis election was in force at the date of disposal and conditions A to D of TCGA92/S47A are satisfied, the capital gains tax exemption in that section applies (CG15480). No capital loss is allowable.

Note: capital allowances were not available on this item because the cash basis election was in force when it was acquired. TCGA92/S41 reduces capital losses to the extent that tax relief has, or could have been, given through capital allowances (CG15410). As no capital allowances were available, no TCGA92/S41 adjustment would be made. The exemption given by TCGA92/S47A prevents tax relief from being given twice for expenditure on plant used in a trade to which a cash basis election applies.

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Example 2 - Cash basis election made after asset began to be used in trade

Mrs B purchased an item of plant for use in her trade on 1 July 2013 for £40,000. She sold it on 30 June 2015 for £30,000, having used it exclusively and continuously in her trade throughout her period of ownership. Capital allowances were claimed on the initial expenditure. A cash basis election applied to the trade from the 2014/15 tax year and the asset satisfied condition A of TCGA92/S47A.

Income tax relief for the loss was given through the cash basis by way of capital allowances on the £40,000 paid on 1 July 2013, including the write-off of any pool balance remaining on entry to the cash basis, and by inclusion of the £30,000 receipt on 30 June 2015 in the cash basis calculation for that period.

As a cash basis election was in force at the date of disposal and conditions A to D of TCGA92/S47A are satisfied, the capital gains tax exemption in that section applies (CG15480). No capital loss is allowable.

Note: capital allowances were not available on this item because the cash basis election was in force when it was acquired. TCGA92/S41 reduces capital losses to the extent that tax relief has, or could have been, given through capital allowances (CG15410). As no capital allowances were available, no TCGA92/S41 adjustment would be made. The exemption given by TCGA92/S47A prevents tax relief from being given twice for expenditure on plant used in a trade to which a cash basis election applies.

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Example 3 - Cash basis election ceased before asset disposed: gain

Dr C purchased an item of plant for use in his trade on 1 July 2013 for £40,000. He sold it on 30 June 2015 for £50,000, having used it exclusively and continuously in his trade throughout his period of ownership. A cash basis election applied to the trade up to the 2014/15 tax year only, when there was a change in circumstances. The asset satisfied condition A of TCGA92/S47A.

The income tax position is as follows. The original £40,000 cost of the asset received an immediate deduction under the cash basis rules. When the cash basis election ceased, the asset entered the capital allowances pool at nil value but with its original cost of £40,000 BIM70073. On disposal, proceeds of £40,000 (limited to cost (CA23250)) go into the pool. Overall, therefore, the income tax result is neutral.

The capital gains calculation is:

Consideration £50,000
   
Less: original cost (S47B(4) applies (CG15485)) (£40,000)
Gain £10,000

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Example 4 - Cash basis election ceased before asset disposed: loss

Ms D purchased an item of plant for use in her trade on 1 July 2013 for £40,000. She sold it on 30 June 2015 for £30,000, having used it exclusively and continuously in her trade throughout her period of ownership. A cash basis election applied to the trade up to the 2014/15 tax year only, when there was a change in circumstances. The asset satisfied condition A of TCGA92/S47A.

The income tax position is as follows. The original £40,000 cost of the asset received an immediate deduction under the cash basis rules. When the cash basis election ceased, the asset entered the capital allowances pool at nil value but with its original cost of £40,000 (BIM70073). On disposal, proceeds of £30,000 go into the pool. Overall, therefore, the income tax result is to give relief for the £10,000 loss.

The capital gains calculation is:

Consideration £30,000
   
Less: original cost (S47B(4) applies (CG15485)) (£40,000)
S41 adjustment (S47B(5) applies (CG15485)) £10,000
Gain £nil