Capital Items against Capital Gains

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion
I am a little confused on a capital gains calculation: My client has sold a business, but kept the building. He sold all the machinery with the business which had a balance sheet value. Does the balance sheet value of the machinery come off as an expense for the capital gains calculation?

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  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    On the assumption your client is a sole trader it is the cost of the asset on acquisition that would be used against sales proceeds not net book values.

    There would also be business asset taper relief to consider.

    Kind regards
    steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    Sorry, I did not explain that very well.
    Client buys a building for £100,000. Starts up a new business in the building with equipment costing £25,000.
    Sells business for £150,000, retaining the building.
    At sale point the equipment has a book value of £12,500.
    For the purposes of working out capital gains do I use the book value of the equipment against the sale proceeds of the business?
    (And yes, he can get full taper relief).
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    Of the £150,000, how much relates to goodwill and how much relates to the tangible business assets. This should be set out in the paperwork relating to the sale (contracts etc.).

    It is unlikely that a capital gain will have been made on the equipment.

    So, say £20,000 related to the equipment, and £130,000 to the goodwill, the accounts would show:

    Profit on sale of equipment £7,500
    Profit on sale of goodwill £130,000

    For tax purposes, no capital gain has been made on the equipment (they cost £25,000 but were sold for £20,000). However, there will be a balancing adjustment to capital allowances.

    The £130,000 gain on goodwill will be subject to CGT under to the normal rules.

    Hope this helps

    Tom
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    Hi TC

    Apologies for the delay in getting back to your question but Tom has referred to the relevant points.

    The solicitor dealing with the sale should be able to give you the split between the goodwill element of the sale and the assets.

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    So, have I got this right. The original equipment cost the client £25,000, but it's book value now stands at £12,500. The proceeds of the sale are £150,000. If the breakdown shows sale of the business (goodwill) at £75,000 and the sale of the equipment at £75,000, then my client would be liable for all the goodwill proceeds and the profit on the sale of the equipment from its original cost - not the book value. Is that correct?
    I do appreciate your help in this one.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    The equipment to which the £75k proportion relates to would be removed from the books in the normal way and this will give rise to either a profit or loss on disposal in the traders accounts (if NBV = £12,500 and proceeds = £75k there will be a profit on disposal of £62.5k - large profits on disposal of businesses are not uncommon). This would be deducted from accounting profits in the normal way you would do when calculating Sch. D1 profits for the trader.

    The £75k (relating to the equipment) will then go as disposal proceeds in the capital allowances computation. This will give rise to either a balancing allowance or balancing charge (no capital allowances will be given on the plant/equipment in the year of disposal). In the capital allowance comp you will have WDV b/f + (possibly) any additions during the year and the disposals will be the £75k proceeds, so:

    TWDV b/f of the equipment (for tax purposes), say £15,000
    Additions = I assume nil
    Disposals = £75,000 (sales proceeds)
    Balancing charge (15,000 - 75,000) = £60,000

    So the traders Sch. D1 computation would show (as a basic extract):

    SCHEDULE D1 COMPUTATION:-
    Profit per accounts (say) £80,000
    Add balancing charge £60,000
    Less profit on disposal of assets (£62,500)

    SCHEDULE DI PROFIT* = £77,500

    *taxable on sole trader - does not include capital gain on sale of goodwill.

    The profit on sale of assets in the accounts will be some (£12,500 - £75,000) = £62,500 which is deducted from accounting profit (as per above). This deduction is essentially netted off by the balancing charge (60,000) which is added back (as shown) - thus compensating for the accounting profit on disposal.

    The TWDV c/f will obviously be nil.

    The balance relating to goodwill will be treated for CGT under normal rules relating to gains and taper relief. Double check if your client has any previously borne capital losses available to offset against any capital gain.

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    Wow, thanks. That is really helpful. Just one silly question - what are you describing at TWDV? I think I am nearly now then. Many thanks for all your help with this one.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    TWDV = Tax written down value.

    Where net book value = cost less depreciation, TWDV = cost less capital allowances.

    Regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    Thank you.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    .
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    I think the sale proceeds in the tax comp are restricted to original cost (25k), and as they are not subject to CGT this would be good news to the client. Equipment increasing in value is very uncommon in my opinion (I am however only 22)

    Apologies if I ve misunderstood, but this is how I see it.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Capital Items against Capital Gains

    Hi John,

    You are correct to flag this up. My figures were used as an (over-inflated) illustration of how TC's situation might work. However, in practice it is unlikely that any capital gain will be made on the sale of the equipment because, as you say, equipment increasing in value is very uncommon (in fact these days it is totally unheard of). I will, however, illustrate your point though:

    If you acquire an asset in year 1 for, say, £10,000. You sell it in year 9 for £12,500 and you incur incidental costs of sale amount to 1,200. The proceeds exceed the cost of the asset so all capital allowances will be withdrawn by way of a balancing charge. Therefore the position on the disposal of the asset is as follows:

    Proceeds = £12,500
    Less incidental costs of sale (£1,200)
    Less allowable expenditure (£10,000)
    This gives a chargeable gain of £1,300.

    Where this calculation produces a loss, the amount of the loss allowable is restricted by any capital allowances given. Basically, this means that the allowable loss is restricted to any incidental costs of acquistion or disposal.

    Best regards
    Steve

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