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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Indexation: disposals 4/85 to 3/88: example: asset held at 31/3/82

X Ltd acquired a ship in March 1975 for £2,000,000.

Its value on 31 March 1982 was £1,000,000.

The ship was sold in March 1988 for £500,000.

The net capital allowances were £1,500.000. Should a claim be made under FA85/S68 (5)?

If a claim is not made the computation is as follows.

 

  £      
         
  Disposal proceeds 500,000    
LESS Cost 2,000,000    
  Deduct capital allowance   1,500,000 500,000
Unindexed loss        
LESS Indexation 500,000 x 0.310 165,000  
ALLOWABLE LOSS (165,000)      
         

If a claim is made the computation is as follows:

      £
       
  Disposal proceeds   500,000
LESS Cost 2,000,000  
  Deduct capital allowances 1,500,000 500,000
Unindexed loss      
LESS Indexation    
(UNRESTRICTED) 1,000,000 x 0.310
  310,000  
  ALLOWABLE LOSS (310,000)

Therefore a claim is advantageous even though the value on 31 March 1982 was lower than original cost, because as explained in CG17450 under these provisions the capital allowances are not deductible from the value on 31 March 1982. They are, on the other hand, deductible from the original cost.

For disposals on or after 6 April 1988 capital allowances are deductible for both rebasing and indexation purposes, TCGA92/SCH3/PARA3 and TCGA92/S55 (3).