PRACTICAL GUIDE: THE PART DISPOSAL RULES IN PRACTICE

Basic principles

A chargeable disposal occurs for capital gains tax (CGT) purposes wherever anyone sells, gifts, or exchanges a non-exempt asset, subject to any available exemptions. In some circumstances a gain can arise where an asset is destroyed.

Generally, the CGT calculation will be the sales proceeds (or market value), less the base cost of the asset and any allowable expenditure, e.g. incidental costs of disposal, or enhancement expenditure. However, where only part of an asset is sold it is classed as a part disposal, and only a proportion of the base cost can be deducted. To find this proportion, you should multiply the base cost of the asset by the fraction A/(A+B), where A is the gross disposal proceeds and B is the market value of the part retained.

Example. The individual's land sale was for £100,000. The value of the remaining plot is £300,000. The whole site cost £250,000 originally. The allowable costs for the part disposal will be £250,000 x (£100,000/£400,000) = £62,500.

The gain on the part disposal of land can therefore be calculated relatively simply. However, the individual's remaining disposals are subject to special rules that need to be applied.

There are some specific considerations with land where the part disposed of is “small”. HMRC’s guidance at CG71870 is a useful starting point.

Shareholdings

Our individual has sold 500 out of a total 1,000 ordinary shares in Acom Ltd. The allowable cost for the part disposal will depend on how the shares were acquired. If they were acquired in a single transaction, or before 31 March 1982, then the allowable cost will simply be 50% of the base cost. However, if the shares were acquired in multiple transactions, the share pooling rules at s.104 Taxation of Chargeable Gains Act 1992 need to be considered.

Shares acquired prior to 31 March 1982 will generally have a base cost equal to their value at that date. 

The share pooling rules match shares disposed of with acquisitions in a particular order:

• any shares purchased on the same day as the disposal; then
• any shares purchased in the 30 days following the date of disposal; then
• the shares in the s.104 pool.

The s.104 pool is the amalgamation of all shares purchased prior to the date of sale. Therefore if the individual purchased 500 shares for £500 in 2010 and 500 for £1,000 in 2020, they have a s.104 holding of 1,000 shares with a cost of £1,500. Their base cost on the disposal of 500 of these shares would therefore be £1,500 x 500/1,000 = £750. If they later repurchased, say, 100 shares for £1,500, their s.104 pool after the disposal would be 600 shares with a cost of £2,250 (as long as this was more than 30 days following the disposal).

Chattels

Chattels are items of tangible, moveable property. This would therefore include the  antique dining chairs. Generally, there are four possible outcomes under the chattels rules that determine how the gain or loss is calculated:

Proceeds and cost both exceed £6,000. There is no special treatment and normal CGT rules apply.

Cost exceeds £6,000 but proceeds don’t. The deemed proceeds become £6,000, restricting the loss.

Proceeds exceed £6,000 but cost does not. The gain is restricted to 5/3 x (gross proceeds - £6,000). If this exceeds the actual gain, the actual gain is used.

Both proceeds and costs are below £6,000. Any gain is exempt from CGT and no loss can be claimed.

The individual has sold eight of their twelve chairs since 6 April this year, two each to four brothers. The set of twelve chairs originally cost £12,000 (so £2,000 per pair) and each pair of chairs was sold for £5,500, which is a fair market value. The remaining four chairs are worth £14,000. The proceeds and costs of each sale are below £6,000, so at first glance it appears that the gains will be exempt. But it is not that simple.

Where chattels are sold to a single person, or a series of connected persons (such as brothers), the sale of the set is considered in place of the individual transactions. Therefore the individual has made a single sale for CGT purposes with proceeds of £22,000 and a cost of £7,333 (£12,000 x (£22,000/(£22,000+£14,000))). A gain of £14,667 has arisen.

Leases

The CGT treatment of leases is complicated. The first thing that needs to be considered is whether the lease is a long lease (more than 50 years) or short lease (50 years or less).

The treatment also differs depending on whether the lease is being assigned (in other words sold, so the seller transfers rights over the property) or granted (where the grantor retains the rights to the property but allows the grantee to use the property for a period).

Our individual has granted a short lease from their freehold interest. The freehold was acquired for £100,000 and the lease is for 20 years at a premium of £50,000. The reversionary interest is £160,000.

The grant of a short lease is subject to both income tax and CGT. The capital element of the proceeds is found by 2% x (N-1) x P, where N is the number of years of the lease and P is the premium received. The remaining income is taxable as property income.

Example. Applying this to our circumstances, the capital element of the premium is 2% x (20-1) x £50,000 = £19,000. The remaining £31,000 will be included on the tax return as property income. The allowable capital cost is £100,000 x £19,000/(£50,000+£160,000)=£9,048. The gain is therefore £9,952.

Damaged asset

The individual has also mentioned that an antique cabinet they own became damaged recently. It is currently unclear if there will be an insurance payout in respect of this.

Where an asset, whether shares or a physical item, becomes of negligible value, a claim can be made to effectively sell and repurchase it immediately for £nil. This creates a loss equal to the base cost of the asset.

If the insurer does pay compensation for the damage, this is by default liable to CGT, using the A/(A+B) method above. The owner could instead make a claim to have the proceeds deducted from the base cost of the asset if they so wished.

So if they purchased the cabinet for, say, £100,000 and received, say, £40,000 from their insurer, spending £30,000 on the restoration, their base cost would become £90,000 (£100,000 - £40,000 + £30,000).

Despite being a chattel, the normal CGT rules apply to this event, as the cost and proceeds were both over £6,000.