BLM73020 - Schedule 12 FA 1997:
capital allowances: disposal proceeds less than cost of asset
– a worked example
Example
A leased asset, cost £1000, generates in year 1
accountancy rental earnings of £120, normal rents (actually
received in the year) of £100 and therefore cumulative
accountancy rental excess carried forward of £20. At the
beginning of year 2 the lease is terminated and the asset is
sold.
- If the asset is sold for less than cost,
say, £990 the lessor will suffer a bad debt and will obtain
relief under the Case I rules (which was also applied for property
income by Paragraph 8, now repealed) to the extent that the bad
debt deduction in the accounts (£1020 - £990 = £30)
has been brought into account for tax (that is £100 -
£120 = £20).
- So overall the lessor is taxed only on
£100 of rent received (and gets relief for the £10 loss
on the sale of the asset through the capital allowances
computation).
- To complete the picture the cumulative
accountancy rental excess of £20 would be reduced to nil under
Paragraph 9(4).
If instead the asset is sold for more than cost, say £1030,
the excess of the sale proceeds over cost will be excluded from the
capital allowances computation under the normal rules and
cumulative accountancy rental excess is set against the disposal
proceeds for capital gains tax under FA97/Sch12/Para12.
