CG15710 - Compensation: part of capital sum not applied not `small'
If condition 2 in CG15700 is not satisfied because the part of the capital sum (see CG12940) which is not used to restore the asset, is not ‘small’ (see CG15703) then the owner cannot claim for the receipt of the capital sum not to be treated as a disposal of the asset. Instead the whole of the capital sum is treated as a disposal.
However, the recipient can claim under s23(3) TCGA92 to have the part of the capital sum which was applied in restoring the asset deducted from the acquisition cost of the asset.
The part of the capital sum which was not applied in restoring the asset is treated as a part-disposal under s22(1) TCGA92 (see CG12948). The part disposal formula of A/A+B where
A = the amount not applied in restoration
and
B= the value of the restored asset
is applied to the original acquisition cost to determine the allowable costs.
The part of the capital sum used in restoration is deducted from allowable expenditure on any later disposal of the asset.
Example
Mr C buys an asset for £50,000 and insures it. In 2017 it is damaged by fire. Mr C receives compensation of £20,000 in November 2017 and in the same month spends £15,000 on restoring the asset. The value of the asset after restoration is £75,000. Mr C makes a claim under s23(3) TCGA92. In June 2018 he sells the asset for £80,000.
The amount which was not spent on restoration is £5,000. This is more than 5% of the compensation (£20,000 x 5% = £1,000).
The amount not used in restoration is not ‘small’. Mr C cannot claim for the receipt of the capital sum not to be treated as a disposal of the asset under s23(1) TCGA92, but he can make a claim under s23(3) TCGA92.
The £5,000 not spent on restoration is therefore treated as the consideration for a part-disposal of the asset.
Step 1 - the part disposal computation
| - | - | £ |
|---|---|---|
| Consideration (amount not used) | - | 5,000 |
| Less acquisition cost | 50,000 x [5,000 / (5,000 + 75,000)] | 3,125 |
| Less restoration cost | 15,000 x [5,000 / (5,000 + 75,000)] | 938 |
| Equals chargeable gain | - | 937 |
The £15,000 spent on restoring the asset is then deducted from the net cost in computing the expenditure on the subsequent disposal of the asset.
Step 2 - the remaining cost
| - | £ |
|---|---|
| Acquisition cost (50,000 - 3,125) | 46,875 |
| Plus restoration cost (15,000 - 938) | 14,062 |
| Less compensation used to restore asset | 15,000 |
| Equals Remaining Cost | 45,937 |
Step 3 - subsequent disposal computation
| - | £ |
|---|---|
| Disposal proceeds | 80,000 |
| Less remaining cost | 45,937 |
| Equals chargeable gain | 34,063 |