The first consideration is: has a disposal occurred? There is no statutory definition of ‘disposal’, so the word must be given its normal meaning. HMRC’s capital gains tax manualCG 10240defines a disposal as ‘an occasion when a person sells an asset or gives it away. Tax may also be charged if the legislation specifically provides for a transaction to be treated as though it were a disposal.'
For capital gains tax purposes, the most common way for a person to dispose of an asset is to sell it to another person. However, a gift or an exchange of assets may also constitute a disposal for capital gains tax purposes. The disposal proceeds will be the actual consideration received unless the disposal is not a ‘bargain at arm’s length’, in which case the disposal is deemed to take place at open market value (TCGA 1992, s17(1)(a)).
Part-disposals
TCGA 1992 s21 (2) provides that a taxpayer makes a part-disposal when he sells part of an asset or where he disposes of a right or interest in an asset.
To calculate the chargeable gain on a part-disposal, we deduct from the sale proceeds the part of the original cost of the asset by using the fraction:
A/(A+B),
Where A is the gross disposal proceeds and B is the value of the part retained.
A part-disposal includes a disposal of a physical part of an asset, eg a ten-acre section of a much larger holding of land. It also includes the disposal of a right or interest in an asset, for example where a lease is granted by the freeholder of land.
Please see 'Capital gains tax on property leases'.
Example:
Paul bought 50 acres of land in 2000 for £100,000. In 2016 he sold 10 acres of the land for £50,000. The value of the remaining land was £350,000.
The capital gain on the part-disposal is calculated as follows:
Proceeds £50,000
Less: cost£100,000 x (£50,000/(£50,000+£350,000)) ie £12,500
Capital gain is £37,500
The base cost of the remaining area of land is the difference between original cost (£100,000) and the amount used as part-disposal (£12,500), ie £87,500.
Small part-disposal of land, not chargeable to capital gains
Where the consideration for a part-disposal of land is ‘small’, the taxpayer may claim that achargeable gain does not ariseand instead treat the proceeds as reducing the original cost of the land (TCGA 1992 s242).
Conditionsof s242 claim:
- The proceedsmust be less than or equal to 20%of the value of the land at the date of disposal.
- The proceeds ofallland sales in the yearmust not exceed £20,000.
- The transfer is not between spouses/civil partners, or between companies of the same group.
- A claim should be made by 31 January following the tax year of the part-disposal.
Effectof s242 claim:
- The proceeds received are ignored when considering the capital gains tax for that year; and
- The proceeds received reduce the base cost of the land on a future disposal. That means that the taxpayer will have a lower base cost when he sells the rest of the land and a higher capital gain on the subsequent disposal.
