Capital Allowances and Capital Gains

What happens to the tax relief you got through claiming capital allowances on a building’s fixtures when the building is sold at a profit? One might feel that in such a case, the capital gains will be computed after deducting the capital allowance claims from the original cost of the property. Naturally, that will lead to a much higher amount of capital gains and tax thereon.

In fact, however, capital allowances do not come into the picture unless the property is sold at a loss.

Let us look at a simple example of sale at a profit:

Sale proceeds ₤ 10,000,000
Original cost of the property sold 7,500,000
Gain on sale 2,500,000

Capital allowances claimed on the fixtures included in the property do not come into the picture for computing taxable capital gains. Instead, there is an adjustment for the price index change from the date of purchase to date of sale. Any increase attributable to general price increases is reduced from the gain as above, and only the balance is considered as taxable capital gain.

In effect, you get to retain the capital allowances you have claimed and the tax relief you have received.

Below is another example where capital allowance does indeed come into the picture. If the property is sold at a loss, you are allowed to set off the loss against other income. However, the loss allowed to be so set off is computed after adjusting the capital allowances you have chosen to retain under section 198.

Sale proceeds ₤ 5,000,000
Original cost of the property 7,500,000
Loss on sale 2,500,000

In this case, if you have claimed capital allowances on this property, you will not be able to set off the entire loss amount against other income (or carry it forward to future years for such set off). Instead, the retained capital allowances will be deducted from the loss amount and only the balance is considered as allowable loss.

Retained capital allowance is computed by deducting the value of the fixtures you have elected to include in the sale price under section 198. For example, if you have claimed capital allowances of 625,000 and surrender 225,000 when making election under section 198, you are retaining 400,000 of your capital allowances. This amount will be deducted from the loss amount above and only the remaining 2,100,000 will be allowed to be set off or carried forward.

Capital Allowance Related Posts

• Section 198 of Capital Allowances Act 2001

  Section 198 of the Capital Allowances Act 2001 has a major significance for property transactions. If the seller of the property has claimed capital allowances on any fixtures of the building,...Read more