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HMRC internal manual

Capital Gains Manual

Land: part-disposals: example

A farmer purchases a 200-acre farm in 1969 for £150,000.

In 1970 he grants a lease over the whole farm for 2 years and receives a premium. The allowable expenditure set against the premium was £30,000.

In 1985 he incurs expenditure of £50,000 on drainage work on 100 acres of the farm.

In 1987 he disposes of 5 fields totalling 20 acres. Those fields were included in the area which was the subject of the drainage work.

Under the special practice, the allowable expenditure will be calculated as follows.

Original cost: £150,000
less deducted in arriving at 1985 gain: 30000

Assuming that the original cost of the farm can be apportioned purely on the basis of area, the part of the original cost which would be allowable on the 1990 disposal would be

20/200 x £120,000 = £12,000

To this figure would be added the appropriate proportion of the cost of the drainage work, that is

20/100 x £50,000 = £10,000

Hence the total allowable expenditure, under the special practice, would be £12,000 + £10,000 = £22,000.