OT30400 - Capital Gains

Loss Restriction.

Because of high oil prices in 1982, the "kink test" will generally result in allowable losses on oil assets being computed by reference to actual cost rather than the rebased 31 March 1982 value. However, FA88 also provided for indexation allowance to be calculated without claim on the higher of actual cost or 31 March 1982 value.

Oil assets are generally wasting assets by nature (e.g. plant and machinery) even though an oil licence will increase in value on discovery of a field before wasting as reserves are depleted during production. However, the sensitivity of their value to oil prices meant that in 1982 the UK and UKCS licences and assets relating to fields under development and in production were often worth substantially more than original cost, especially as licences in general were issued for nominal consideration.

Therefore, it was expected that indexation allowance would be calculated on 31 March 1982 value producing substantial losses when in fact no actual loss had been suffered. Although TCGA92\s55(3) operated to reduce the value by any capital allowances given, or claimable, on the original acquisition costs, the effect on licence values would have been marginal.

As fields approached abandonment and their value decreased, the losses likely to be created by indexation were forecast to increase many-fold and it was considered that companies would seek to crystallise some of these by earlier disposals rather than be left with large, but potentially unutilisable, losses at the end of field life.

FA90 therefore introduced rules now at TCGA92\s200 for disposals on or after 22 January 1990 and before 30 November 1993 to limit the losses created by indexation allowance on "oil industry assets" held at 31 March 1982. The definition includes shares held at 31 March 1982 in unquoted companies deriving the greater part of their value from such assets or oil rights as it was recognised similarly large losses could arise from their disposal. The section was repealed for disposals on or after 30 November 1993 since FA94\s93 has prohibited the creation or augmentation of losses by indexation for any disposal from that date.