CG14300 - Computation: interaction with other taxes: IT: introduction

Sums chargeable as income

Exclusion of expenditure

Income/profits not chargeable to Income Tax

Conclusiveness of Income Tax decisions

Sums chargeable as income

TCGA92/S37

Any part of the consideration for disposal of an asset which has either been charged to tax as income, or taken into account in computing income, should be excluded from the consideration for the disposal of the asset in computing the chargeable gain or allowable loss. This exclusion does not apply to

·         premiums chargeable as property income, see CG70900+

·         consideration which has been taken into account for capital allowance purposes, see CG15400+.

·         situations where the income in question is not treated as the income of the person making the disposal. Typically this is a case of a settlor interested trust where the income is taxed on the settlor. If in this situation the settlor is assessable to both income tax and capital gains tax then relief may be available under S32 TMA1970.

 

Exclusion of expenditure

TCGA92/S39

Any sum which has been deducted in computing income or profits, or would have been so deducted if there had been sufficient income or profits, is not allowable as a deduction for Capital Gains Tax purposes. Special rules apply to expenditure which has qualified for capital allowances or renewals allowances, see CG15410.

TCGA92/S39 (2) makes clear that no expenditure of a revenue nature is allowable. It expressly prohibits the allowance of any sum which would have been deducted in computing the profits of a trade, if the asset in question had been a fixed asset in use for the purposes of the trade. See Emmerson v Computer Time International Ltd (in liquidation), 50TC628.

Example 1

Mr R buys a picture for £100,000. He pays £5,000 to have it restored and reframed. At a cost of £10,000 he equips a room having controlled temperature and humidity for the preservation of the picture and fitted with suitable security devices. If Mr R then disposes of the picture, in computing the chargeable gain or allowable loss on the disposal:

·         the cost of restoring and reframing the picture is allowable expenditure

·         the cost of equipping the room, although capital expenditure incurred solely for the purpose of preserving the picture, is not allowable expenditure because it is not incurred on the painting - it was incurred on the building

·         the cost of heating and lighting the room is revenue expenditure and consequently not allowable (notwithstanding that it is in connection with the ownership of the picture).

Example 2

In 2005, Miss S buys a cottage which is not her main residence and incurs £5,000 in making good dilapidations. In 2007, she has the cottage rewired at a cost of £1,000 and has it redecorated throughout at a cost of £1,200. In 2012, she adds a garage at a cost of £2,000 and, in 2018, sells the whole asset.

In the computation of the chargeable gain or allowable loss on disposal, the allowable expenses are

·         the cost of acquisition

·         costs incidental to disposal

·         £5,000 spent in making good dilapidations

·         the £2,000 cost of the garage.

The cost of rewiring and decorating is not allowable, because if the cottage had been a fixed asset used for the purposes of a trade, this would not have been capital expenditure.

 

Income/profits not chargeable to Income Tax

TCGA92/S52 (2) & TCGA92/S52 (3)

For Capital Gains Tax purposes, sums taken into account as receipts or as expenditure for Income Tax purposes include sums which would be so taken into account but for the fact that any profits or gains of a trade, profession, employment or vocation are not chargeable to Income Tax, or that losses are not allowable for those purposes.

Income or profits charged or chargeable to tax include income or profits taxed or taxable by deduction at source, even if tax is not in fact deducted on payment.

Conclusiveness of Income Tax decisions

Any Income Tax determination is conclusive for the purposes of Capital Gains Tax in relation to TCGA92/S37 and TCGA92/S39. Thus, a person cannot claim to have an item of expenditure allowed as a revenue expense for Income Tax purposes and then claim in relation to Capital Gains Tax that it is capital expenditure which should increase the cost of acquisition of the relevant asset.