Chargeable Gains – Companies
1 General
Unlike individuals, where income tax is paid on income and capital gains tax is paid on taxable gains (i,e, two separate taxes), a company's chargeable gains are included in the calculation of Taxable Total Profits (TTP) and one tax, corporation tax, paid on them along with income.
A UK resident company is chargeable on its worldwide gains and may dispose of a chargeable asset not only by sale but also on the loss or destruction of an asset.
All assets are chargeable assets unless they are specifically exempt.
1.1 Calculation of gains and losses for companies
The calculation of the chargeable gains and allowable losses is much the same as for individuals, with the exception that companies may be entitled to deduct an additional 'cost' known as the 'indexation allowance'.
£ | |
Disposal proceeds (or market value) | X |
Less: incidental costs of disposal | (X) |
Net proceeds | X |
Less: allowable costs | (X) |
Unindexed gain | X |
Less: indexation allowance | (X) |
Chargeable gain | X |
1.2 The indexation allowance
The indexation allowance (IA) uses the rise in the retail price index (RPI) as an allowance for the effects of inflation.
It ceased to be available from December 2017.
The calculation of the IA for each element of cost is as follows:
Relevant indexation factor × capital expenditure
The indexation factor is applied to the acquisition cost (including incidental costs of acquisition) and enhancement costs separately (as these will be incurred on different dates).
You should use the indexation factor provided in the question for the movement from the month of expenditure to the month of disposal (or December 2017 if disposed of after that date).
The IA is available to reduce a gain but cannot create or increase a loss.
Unused indexation allowance is wasted.
If the RPI falls, rather than increases, between the date of acquisition and the date of disposal, then the indexation allowance is £Nil.
A company bought an asset on 6 June 1987 at a cost of £20,000.
Enhancement expenditure of £6,000 was incurred on 16 August 1991.
The asset was sold on 2 October 2025.
Incidental costs of sale are £1,000.
Calculate the chargeable gain arising on the disposal of the asset if the gross proceeds of sale were:
(a) £100,000
(b) £60,000
(c) £25,000
The relevant indexation factors are as follows:
June 1987 to December 2017 | 1.729 |
August 1991 to December 2017 | 1.074 |
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2 Gains and losses
Capital gains are chargeable to corporation tax.
Capital losses only arise when net proceeds are less than allowable cost.
REMEMBER: Indexation allowance may not be used to either create or increase a loss.If capital gains and losses arise in the same accounting period, they are netted off.
If the resultant figure is a gain, it is charged to corporation tax.
If the resultant figure is a loss, it is carried forward and set against future capital gains.
Capital losses may only be relieved against chargeable gains, not income.
3 Share matching rules for companies
Disposal of shares gives rise to a chargeable gain or allowable loss. It is difficult however to identify which shares are being sold, and therefore establish the cost of those shares sold where it is only some of the shareholding being sold and the shares had been acquired over a period of time at different costs.
It is necessary to identify the shares sold by using matching rules as laid down by HMRC which, are not exactly the same as the matching rules that used when dealing with the same problem for individuals disposing of shares. Thus the shares sold are deemed to be disposed of in the following order:
shares acquired on same day
shares acquired in previous 9 days
shares contained within the share pool which is made up of any shares acquired more than 9 days previous.
The share pool records the number and cost of shares for each acquisition and disposal as it did for individuals, but also has to deal with the fact that companies are entitled to indexation allowance.
Thus whenever the pool changes value (i.e.shares are purchased (including a rights issue) or sold) the pool must be updated for indexation and so the pool has an additional column, 'Indexed Cost' and indexation is kept track of within the pool.
When shares are disposed of, the average cost is deducted from the pool (as for individuals) and for companies the average indexation must be calculated too. This is calculated as the difference between the figures for average cost and average indexed cost which are deducted from the 'Indexed Cost' column.
Indexation factors will be given in the question and indexation allowance is frozen at December 2017.
A Ltd bought the following shares in B Ltd:
20 August 1990 | 1,000 shares at a cost of £5,000 |
16 November 1997 | 2,000 shares at a cost of £12,000 |
7 December 2025 | 500 shares at a cost of £5,000 |
A Ltd sold 2,000 shares on 10 December 2025 for £36,000
Calculate the chargeable gain arising on the disposal in December 2025.
Indexation factors are as follows:
August 1990 to November 1997 | 0.246 |
November 1997 to December 2017 | 0.742 |
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4 Bonus issues
A bonus issue increases the number of shares held with no corresponding increase in cost.
The bonus shares are simply added to the number of shares column in the pool.
As a bonus issue does not change the value of the pool, so do not index the pool before adding in the number of shares in the bonus issue, but remember that the next time the pool changes value, the indexed cost in the pool must be indexed from the date of the last indexation that took place, not the date of the bonus issue.
5 Rights issues
A rights issue again increases the number of shares held, but this time there is also a cost associated with the shares. It is therefore dealt with in the same way as any other acquisition.
The indexed cost in the pool is indexed to the date of the rights issue. The rights shares are added to the number of shares column and the cost is then added to both the cost and indexed cost columns in the pool.
Y Ltd acquired 3,000 shares in X Ltd on 20 July 1994 for £10,000. In February 1996 X Ltd made a 1:3 bonus issue.
Y Ltd sold 2,000 shares in March 2026 for £12,000.
Calculate the gain on the disposal of the shares in March 2026.
Indexation factors are as follows:
July 1994 to February 1996 | 0.048 |
February 1996 to December 2017 | 0.843 |
July 1994 to December 2017 | 0.931 |
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6 Takeovers
Where a takeover is a share for share deal or paper for paper transaction, shareholders of the company taken over acquire shares in the acquiring company. This normally does not constitute a chargeable disposal.
The new shares are deemed to have been acquired for the same cost and at the same time as the original shares.
Mixed consideration: A takeover may involve attributing the cost of the original holding to the different component parts of the new holding, if a mix of consideration is received; e.g. a combination of ordinary and preference shares. This is done by allocating the cost of the original holding to the new shares according to the market value of what is received at the time of the takeover.
Z Ltd acquired 10,000 A Ltd shares in August 1989 for £10,000. In July 2016 B plc takes over A Ltd and for each share in A Ltd, Z Ltd receives:
2 B plc ordinary shares valued at £1.50 each and, 1 B plc preference shares valued at £1 each.
The preference shares are sold in March 2026 for £15,000.
Calculate the gain arising as a result of the takeover in July 2016, and the sale of the B plc preference shares in March 2026.
Indexation factor from August 1989 to December 2017 is 1.402
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If at takeover, cash is received, a chargeable gain needs to be calculated at takeover for the cash element received.
Using Example 4, what difference would it make if Z Ltd receives at takeover:
2 B plc ordinary shares valued at £1.50 each and £1 cash for each share in A Ltd.
The indexed rise between August 1989 and July 2016 is 1.275
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Shares disposals for individuals and companies will always form a part of a larger question if they are examined in a Section B or C question.
Individuals: the exam question will probably have other gains and losses to calculate or may include an element of IHT.
Companies: the exam question may include other gains and/or losses but is more likely to form part of a larger question - calculating TTP or tax due.