ACCA ATX ^UK Syllabus A2. Chargeable gains - Allowable expenditure on a part disposal - Notes ^{3 / 3}

A part disposal

If an individual owns a chargeable asset and disposes of only part of it, a capital gain will arise. 

For example, if an individual owns a large piece of land and decides to only dispose of a part of it, this is known as a part disposal. 

Or, if an individual owns 5 antique vases, bought as a set, then disposing of only 2 from the set is considered to be a part disposal of the whole set.

• A cost from the entire asset cost must be given to the part of the asset being disposed of.

  This is known as the allowable cost.

  This allowable cost is then deducted from the proceeds received for the part disposal, to arrive at a capital gain.

How much cost can you deduct from the disposal proceeds?

= Original purchase cost * [A / (A+B)]

Where:

• A – Disposal proceeds received
  B – Market value of the remainder of the asset (Given in question)

Illustration:

Peter buys a house for £26,000 in October, 1998. 

He has never lived in the house as his main residence. 

He sells the garden for £100,000 in August 2024, incurring selling costs of £1,000.

The value of the remaining house in August 2024 is £160,000.

• What capital gain will arise on this sale?

Solution:

Allowable cost for part sold:

• Original purchase cost = £26,000

  Proceeds received (A) = £100,000

  Market value for the remainder of the house (B) = £160,000

• Original purchase cost * [A / (A+B)]

  £26,000 * [£100,000 / (£100,000 + £160,000)] = £10,000

• Notice that only £10,000 is considered to be the allowable cost. 

  This is because, this is the amount of cost that relates only to the part of the asset being disposed of.

  The other £16,000 is known as the base cost. 

  It relates to cost that will be used to calculate the capital gain when the remainder of the asset is disposed of.

Chargeable gain on sale:

Disposal proceeds £100,000

Incidental cost to sell (£1,000)

Net proceeds £99,000

Allowable cost (£10,000)

Chargeable gain £89,000

Less annual exemption (£3,000)

Taxable gain £86,000

Illustration

The base cost of remaining house is: Original purchase cost – Allowable costs used. 

£26,000 - £10,000 = £16,000

If the remainder of the house was disposed of for £120,000 after one year, what taxable gain would arise then?

• Disposal proceeds £120,000

  Allowable cost (£16,000)

  Chargeable gain £104,000

  Less annual exemption (£3,000)

  Taxable gain £101,000