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Hi F6 Tutor!
I am having some difficulty with the following example. I do not understand how they got the “net capital allowances” figure.
Why did they use the real loss figure instead of doing a Capital allowance computation?Fred bought a machine for use in his trade for £35,000 in April 2002. In October 2012 he decided to replace it and sold the old machine for £26,500.
Calculate the chargeable gain or allowable loss arising.
Answer
Fred has sold the machine for a real loss of £8,500 (£35,000 – £26,500). He is compensated for this loss through the capital allowances system (i.e. he receives net capital allowances of £8,500 during his period of ownership of the machine).
The capital loss computation is therefore adjusted to reflect the relief for the loss already given through capital allowances as follows:
Sales proceeds $26,500
Less: Cost ($35,000)
Net capital allowances ($8500)
Allowable loss NilThis question is about computations of gains, the special rules.
The question here is not actually about the special capital gains rules for chattels but is simply the fact that plant and machinery that has qualified for capital allowances cannot result in a capital loss for purposes of CGT. This is due to the fact that the taxpayer is already compensated for the net cost of ownership of the asset through the capital allowances system as the CA computation will have added in the cost and deducted the sale proceeds leaving the net cost within the capital allowances which will be deducted in deriving the adjusted trading profit of the business. As tax relief is given against trading profits the same “loss” cannot also give rise to a capital loss!
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