OT30152 - Capital Gains

Allowable Costs. Wasting Asset Rules.

A licence is in almost all cases a wasting asset, having a life of less than 50 years and in accordance with TCGA92\s44 the expenditure will be wasted, subject to the important exception discussed in the following paragraphs.

Following a Special Commissioner's decision of 1987 the OTO has accepted that a licence is an interest in land. The TCGA92\Sch8 rules for wasting an interest in land will therefore apply.

The important exception is that TCGA92\s47 takes out of the wasting asset rules, assets which are used for the purpose of a trade and in respect of which a person has claimed or could have claimed any capital allowance on the expenditure. Expenditure by an original licence holder on the acquisition of a licence will generally be allowable expenditure for CGT purposes, and since it also qualifies for MEA, the wasting asset rules will not apply. Expenditure on E&A drilling by the person disposing of the licence is allowable for CGT purposes under TCGA92\s195 only to the extent that there has been an SRA clawback or would have been had the company traded. Where this expenditure qualified for SRA (which would happen only if the company did actually trade) it will also be excluded from the wasting asset rules.

Where allowable expenditure on a licence qualifies only in part for capital allowances, only that part is excluded from the wasting asset rules (TCGA92\s47(2)). This is particularly relevant where the person disposing of the licence acquired it from another company. The expenditure qualifying for capital allowances will normally be limited to the original expenditure incurred by the previous owners. The balance will not qualify for capital allowances and will therefore be subject to the wasting asset rules.