CG12731 - Part disposals: allowable costs and apportionment

What costs are allowable in a part disposal?

 

When a person disposes of part of an asset you need to consider carefully which expenditure is allowable in the computation of the chargeable gain or allowable loss on the part that has been disposed of.

Each cost in a part disposal can be put into one of three categories:

• Expenditure relating to the asset as a whole – this must be apportioned between the part that’s been disposed of and the part that’s been retained
• Expenditure relating solely to the part that has been retained – this will not be allowable at all in computing the gain on the part that has been disposed of.
• Expenditure relating solely to the part of the asset that has been disposed of – this will be fully allowable in computing the gain on the part that has been disposed of.

 

Apportioning expenditure that relates to the whole asset

Allowable expenditure should normally be apportioned by using the formula:

Expenditure allowable in the capital computation for the part disposed = Expenditure x (A / (A +B))

where

A = the disposal consideration

B = the market value of the part retained at the time of the part disposal

It will be necessary to ask either the Valuation Office Agency (“VOA”), for land and buildings, or Shares and Assets Valuation (“SAV”), for any other assets, to provide a valuation of the part retained.

Example

A person buys an asset for £40,000 and sells a part of it for £15,000. At the time of sale, the market value of the remainder of the asset is £45,000. The allowable expenditure apportioned to the disposal is:

£40,000 x (£15,000 / (£15,000 + £45,000)) = £10,000      

The adjusted cost of the remainder of the asset (for the purposes of any later disposal) is:

£40,000 - £10,000 = £30,000.

Rebasing

Under the rebasing rules the acquisition cost of assets acquired before 1 April 1982 is rebased to the asset’s value at 31 March 1982. For part disposals, if the part disposal is in respect of an asset held at 31 March 1982, you use the part disposal formula to apportion the asset’s March 1982 value instead of its original cost.

Later disposals of the remainder of the asset

The remainder of the expenditure is allowable on a future disposal of the part retained.

Special rules

There are some circumstances where a person can adopt a slightly different treatment if they wish.

Apportionment as a fraction

Where the part sold is clearly a recognisable fraction of the whole asset, the allowable expenditure may be divided in accordance with that fraction in order to avoid unnecessary valuation work. This will commonly apply in relation to a part disposal of shares out of a share pool and CG51622 provides an example of the form of computation which may be used.

Capital sums derived from assets

If a person receives compensation for damage to a chargeable asset, this will normally be treated as an occasion of a disposal for capital gains purposes. If the asset is not completely lost or destroyed, the compensation received is treated as a part disposal. There are special rules which can be applied in certain circumstances where the compensation is wholly or partly used to restore the asset which has been damaged, or where the compensation is small compared with the value of the asset, see CG15700P.

Small part disposals of land

Special rules may also apply in the case of small part disposals of land, see CG71870.

Disposal of the entire interest in a parcel of land

Another situation in which you may not need to apply the normal part disposal rules is where a part of the entire interest in a parcel of land is disposed of so that, after the disposal, the land sold is recognisably separate from the land retained, see CG71800C.

Disposal of an interest in an asset for a limited period

Under s52(1), if the part disposal is a disposal of an interest in an asset for a limited period, so that at the end of the period the person is able to dispose of the whole unencumbered asset, the cost to be attributed to the final disposal is the residue after the apportionment of allowable expenditure to the first and any subsequent part disposals.

Exceptions

This treatment does not apply to sub-leases granted out of short leases, see CG71000P.