Rickie Lowery outlines the rules relating to part-disposals of assets.
Where an entire asset is involved, the capital gains tax (CGT) rules tend to be relatively straightforward.
However, what are the rules where only part of an asset is disposed of?
Starting point
In general, where part of an asset is disposed of, only a proportion of the base cost can be set against any proceeds received (or treated as received). This proportion is A/(A+B): where A is the gross disposal proceeds; and B is the market value of the part retained. A special rule for small-part-disposals of land can be applied, if so desired.
However, several specific rules exist for certain asset types.
Shareholdings
For all shares of the same class in the same company purchased after 31 March 1982, the cost is pooled (as per TCGA 1992, s 104). At each disposal, the pooled cost is apportioned based on the number of shares disposed of. Note that shares held at 31 March 1982 are ‘rebased’ to their value at that date in place of the actual amount paid.
The exception is that any shares acquired on the day of the disposal are treated as being disposed of first, followed by any shares acquired in the 30 days following the disposal. The latter rule is to prevent what is known as ‘bed and breakfasting’.
Chattels
A chattel is an item of tangible, moveable property (e.g., a painting). Special rules apply to the disposal of chattels, depending on whether the proceeds and costs are above or below £6,000 (see HMRC guidance in the Capital Gains Manual).
Individual items sold from a set may be considered separately in relation to the chattel rules. However, where the items are disposed of to a single person or a series of connected persons, the set is considered a single chattel. The basic A/(A+B) rule must therefore be used.
Damaged items
Where an item is damaged and compensation or insurance monies are received, this is treated as a part-disposal for CGT purposes using the general rule. The compensation or insurance received represents A, and the market value of the damaged item is B.
If the asset is repaired, any amounts spent are added to the base cost of the asset for future disposals. The chattel rules above may apply, depending on the type and value of the damaged item.
Leases
One of the more complex part-disposal scenarios is leases. For CGT purposes, there are two types of lease – a ‘long’ lease (i.e., more than 50 years) and a ‘short’ lease (i.e., 50 years or less). There are also two types of disposal; ‘assignment’ (i.e., where the lease is transferred in full) and ‘granting’ (i.e., where the grantor merely allows the grantee to use the property).
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Assignment of a long lease – This is the simple disposal of a complete asset, so proceeds less cost.
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Assignment of a short lease – Again, this is a normal disposal, but the base cost is treated as having been partially consumed, so only a proportion (i.e., a percentage at assignment or a percentage at acquisition) can be set against the proceeds. These percentages are found in the legislation (at TCGA 1992, Sch 8).
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Grant of a long lease – The formula A/(A+B) must be used to find the allowable cost, where A is the gross premium received and B is the value of the remainder (or the ‘reversionary interest’).
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Grant of a short lease – These are subject to both CGT and income tax. The capital part (a) of the proceeds is found by applying 2% x ((number of years on the lease – 1) x gross premium received). The allowable cost is then calculated as A/(A+B), where A and B are as for (iii).
Practical tip
Anyone making a part-disposal of an asset should check whether a special rule applies to avoid unexpected tax liabilities. In particular, anyone selling items which could be considered part of a set should try and keep sales to single (or connected) buyers below £6,000 where possible, to minimise their CGT liability.
