Rebasing to 31/3/82: kink test: two computations must be made
The kink test does not apply to gains on disposals on or after 6 April 2008 that are charged to capital gains tax. Therefore the following guidance only applies to disposals by companies that pay corporation tax on their chargeable gains.
- no election has been made under TCGA92/S35 (5), see CG16760, and
- the disposal is not a specified no gain/no loss transfer listed in CG16880 (so that the benefit of rebasing is deferred),
the rebasing legislation requires two computations of the gain or loss accruing on the disposal to be made
- the first by reference to a deemed acquisition of the asset as at 31 March 1982 (the rebased gain or loss), and
- the second on the old rules; that is without rebasing.
In computing the gain or loss on the old rules the provisions of TCGA92/SCH2 (assets held at 6 April 1965) must be taken into account. This means that if a valuation of the asset as at 6 April 1965 is necessary either mandatorily or as a result of an election then that value is the starting point for the computation of the gain or loss. Otherwise the relevant gain or loss is normally the gain or loss after time-apportionment by TCGA92/SCH3/PARA6. See CG15500+ for detailed instructions.
In computing both the rebased gain and the gain on the old rules, indexation allowance is given by reference to the higher of
- the 31 March 1982 market value, or
- the relevant allowable expenditure incurred up to 31 March 1982
by virtue of TCGA92/S55; and the relevant gain or loss is
- after indexation allowance, but
- before any reliefs like private residence relief.
Finally the rebased gain or loss is compared with the gain or loss on the old rules. This is known as the kink test and the rules are
- if both computations result in a gain select the smaller gain
- if both computations result in a loss select the smaller loss
- if one computation results in a gain and the other results in a loss the disposal is deemed to be at no gain/no loss
- if the computation under the old rules results in no actual gain or loss or the old rules deem there to be neither a gain nor a loss then the disposal is deemed to be at no gain/no loss whatever the value of the rebased gain or loss.
This gives the gain or loss which, subject to any further reliefs or exemptions, is the chargeable gain or allowable loss.
Further guidance on indexation allowance is at CG17200+