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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Indexation: example: wasting assets/assets derived from other assets

In his will Mr K, who died on 1 February 1983, left the film rights in a novel to his daughter Miss L, and the rest of the copyright to his son Mr M. the respective probate values were £50,000 and £35,000.

1 January 1987 Miss L acquired the rest of the copyright from Mr M for £60,000. This was a transaction between connected persons, and Shares and Assets Valuation, see CG68300, advised that the value was £80,000.

1 January 1992 Miss L sold the (entire) copyright for £200,000. The copyright is a wasting asset as it will cease to exist on 31 December 2033.

Mr M’s computation is

    Market value on sale   80,000
LESS   probate value 35,000  
    wasted 3/50 2,100  
  Wasted cost     32,900
    Unindexed gain   47,100
LESS Indexation 32,900   6,744
    INDEXED GAIN   40,356

For Miss L TCGA92/S43 applies because the value of the copyright in her hands is partly derived from the film rights which she had previously. Once she had the copyright as a whole, the film rights as a separate asset ceased to exist. Her computation is:-

  Disposal proceeds     200,000
LESS Costs      
  Probate value 50,000    
  less wasted 8/50 8,000 42,000  
  Market value 80,000    
  less wasted 5/47 8,510 71,490 113,490
    Unindexed gain   86,510
LESS Indexation 113,490 x 0.356   40,402
    INDEXED GAIN   46,402

Indexation runs on BOTH items of allowable expenditure from 1 January 1987. (If on the other hand Mr M had paid his sister to surrender her film rights, indexation would have run on the copyright from the date of Mr K’s death as acquisition costs, and on the market value of the film rights from the date of surrender as enhancement expenditure.)

There are examples demonstrating the case where a leaseholder buys the freehold at CG71420 - CG71423.