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6 Example: bonus and rights issue

6 Example: bonus and rights issue

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FA 1985 share pool

5.00
10.02

Acquisition
Bonus 2:1

6.06

Indexed rise

No. of shares

198.5  170.7
 £45,000
170.7
Rights 1:3
1.16

10,000
20,000
30,000

10,000
40,000

Cost
£
45,000

Indexed cost
£
45,000

40,000
85,000

7,329
40,000
92,329

(42,500)
42,500

28,373
120,702
(60,351)
60,351

Index rise
259.5  198.5
 £92,329
198.5
Disposal

c/f
The gain is:
Proceeds
Less cost
Unindexed gain
Less indexation allowance £(60,351 – 42,500)
Indexed gain

(20,000)
20,000

£
120,000
(42,500)
77,500
(17,851)
59,649

3.7 Reorganisations and takeovers
The rules on reorganisation and takeovers apply in a similar way for company shareholders as they do
for individuals.

In the case of a reorganisation, the new shares or securities take the place of the original shares. The
original cost and the indexed cost of the original shares is apportioned between the different types of
capital issued on the reorganisation.
Where there is a takeover of shares which qualifies for the 'paper for paper' treatment, the cost and
indexed cost of the original holding is passed onto the new holding which take the place of the original
holding.

Question

Takeover

J Ltd acquired 20,000 shares in G Ltd in August 1990 (RPI = 128.1) at a cost of £40,000. It acquired a
further 5,000 shares in December 2006 (RPI = 202.7) at a cost of £30,000.
In September 2015, G Ltd was taken over by K plc and J Ltd received one ordinary share and two
preference shares in K plc for each one share held in G Ltd. Immediately following the takeover, the
ordinary shares in K plc were worth £4 per share and the preference shares in K plc were worth £1 per
share.
(a)

Show the cost and indexed cost of the ordinary shares and the preference shares in K plc.

(b)

Calculate the gain arising if J Ltd sells 10,000 of its ordinary shares in K plc for £42,000 in
February 2016 (assumed RPI = 259.9).

Part F Corporation tax  20: Chargeable gains for companies

301

Answer
(a)

G Ltd FA 1985 share pool
No. of shares

8.90
12.06

Acquisition
Indexed rise
202.7  128.1  £40,000
128.1
Acquisition

20,000

Cost
£
40,000

Indexed cost
£
40,000

23,294
5,000
25,000

30,000
70,000

30,000
93,294

Note that the takeover is not an operative event because the pool of cost is not increased or
decreased and so it is not necessary to calculate an indexed rise to the date of the takeover.
Apportionment of cost/indexed cost to K plc shares
No. of shares

Ords  1
Prefs  2
Totals
(b)

25,000
50,000

K plc ordinary shares FA 1985 share pool

12.06
2.16

Acquisition (deemed)
Indexed rise
259.9  202.7
 £62,196
202.7
Disposal

MV

Cost

£
100,000
50,000
150,000

£
46,667
23,333
70,000

£
62,196
31,098
93,294

No. of shares

Cost
£
46,667

Indexed cost
£
62,196

25,000

Indexed cost

17,551
(10,000)
15,000

(18,667)
28,000

79,747
(31,899)
47,848

Note that the indexation allowance on the ordinary shares is calculated from the December 2006, not
from the date of the takeover.
The gain is:
Proceeds
Less cost
Unindexed gain
Less indexation allowance £(31,899 – 18,667)
Indexed gain

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20: Chargeable gains for companies  Part F Corporation tax

£
42,000
(18,667)
23,333
(13,232)
10,101

4 Relief for replacement of business assets
(rollover relief)
FAST FORWARD

Rollover relief for replacement of business assets is available to companies to defer gains arising on the
disposal of business assets.

4.1 Conditions for relief
As for individuals, a gain may be deferred by a company where the proceeds on the disposal of a
business asset are spent on a replacement business asset under rollover relief.
The conditions for the relief to apply to company disposals are:
(a)

The old assets sold and the new asset bought are both used only in the trade of the company
(apportionment into business and non-business parts available for buildings).

(b)

The old asset and the new asset both fall within one (but not necessarily the same one) of the
following classes.
(i)

Land and buildings (including parts of buildings) occupied as well as used only for the
purposes of the trade

(ii)

Fixed plant and machinery

(c)

Reinvestment of the proceeds received on the disposal of the old asset takes place in a period
beginning one year before and ending three years after the date of the disposal.

(d)

The new asset is brought into use in the trade on its acquisition.

Note that goodwill is not a qualifying asset for the purposes of corporation tax.

A claim for the relief must be made by the later of four years of the end of the accounting period in which
the disposal of the old asset takes place and four years of the end of the accounting period in which the
new assets is acquired.

4.2 Operation of relief
Deferral is obtained by deducting the indexed gain from the cost of the new asset. For full relief, the
whole of the proceeds must be reinvested. If only part is reinvested, a gain equal to the amount not
invested, or the full gain, if lower, will be chargeable to tax immediately.

The new asset will have a base cost for chargeable gains purposes of its purchase price less the gain
rollover over.

Question

Rollover relief

D Ltd acquired a factory in April 2000 (RPI = 170.1) at a cost of £120,000. It used the factory in its trade
throughout the period of its ownership.
In August 2015 (assumed RPI = 258.4), D Ltd sold the factory for £220,000. In November 2015, it
acquired another factory at a cost of £190,000.
Calculate the gain chargeable on the sale of the first factory and the base cost of the second factory.

Part F Corporation tax  20: Chargeable gains for companies

303

Answer
Chargeable gain on sale of first factory

Proceeds
Less cost
Unindexed gain
258.4  170.1 = 0.519  £120,000
170.1
Indexed gain
Less rollover relief (balancing figure)
Chargeable gain: amount not reinvested £(220,000 – 190,000)

££
220,000
(120,000)
100,000
(62,280)
37,720
(7,720)
30,000

Base cost of second factory

Cost of second factory
Less rolled over gain
Base cost

£
190,000
(7,720)
182,280

4.3 Depreciating assets
The relief for investment into depreciating assets works in the same way for companies as it does for
individuals.
The indexed gain is calculated on the old asset and is deferred until the gain crystallises on the earliest of:
(a)
(b)
(c)

304

The disposal of the replacement asset
The date the replacement asset ceases to be used in the trade
Ten years after the acquisition of the replacement asset

20: Chargeable gains for companies  Part F Corporation tax

Chapter Roundup


Chargeable gains for companies are computed in broadly the same way as for individuals, but indexation
allowance applies and there is no annual exempt amount.



The indexation allowance gives relief for the inflation element of a gain.



There are special rules for matching shares sold by a company with shares purchased. Disposals are
matched with acquisitions on the same day, the previous nine days and the FA 1985 share pool.



Rollover relief for replacement of business assets is available to companies to defer gains arising on the
disposal of business assets.

Quick Quiz
1

A company is entitled to an annual exempt amount against its chargeable gains. True/False?

2

Indexation allowance runs from the date of

3

What are the share matching rules for company shareholders?

4

H Ltd sells a warehouse for £400,000. The warehouse cost £220,000 and the indexation allowance
available is £40,000. The company acquires another warehouse ten months later for £375,000. What is the
amount of rollover relief?

to date of

. Fill in the blanks.

Part F Corporation tax  20: Chargeable gains for companies

305

Answers to Quick Quiz
1

False. A company is not entitled to an annual exempt amount against its chargeable gains.

2

Indexation allowance runs from the date of acquisition to date of disposal.

3

The matching rules for shares disposed of by a company shareholder are:
(a)
(b)
(c)

4

Shares acquired on the same day
Shares acquired in the previous nine days
Shares from the FA 1985 pool

The gain on the sale of first warehouse is:

£
400,000
(220,000)
180,000
(40,000)
140,000
(115,000)
25,000

Proceeds
Less cost
Unindexed gain
Less indexation allowance
Indexed gain
Less rollover relief (balancing figure)
Chargeable gain: amount not reinvested £(400,000 – 375,000)
Now try the questions below from the Practice Question Bank

306

Number

Type

Marks

Time

Q48

Section A

6

12 mins

Q49

Section B

10

19 mins

Q50

Section C

10

19 mins

20: Chargeable gains for companies  Part F Corporation tax

Losses

Topic list
1 Trading losses – overview

Syllabus reference
E2

2 Carry forward trade loss relief

E2(e)

3 Trade loss relief against total profits

E2(f)

4 Choosing loss reliefs and other planning points
5 Other losses

E2(g)
E2(d), E3(c)

Introduction
In the previous three chapters we have seen how a company calculates its
taxable total profits and the corporation tax payable.
We now look at how a company may obtain relief for losses.
In the next chapter we will look at groups, and in particular how losses can be
relieved by group relief.

307

Study guide
Intellectual
level
E2

Taxable total profits

(d)

Understand how relief for a property business loss is given.

2

(e)

Understand how trading losses can be carried forward.

2

(f)

Understand how trading losses can be claimed against income of the
current or previous accounting periods.

2

(g)

Recognise the factors that will influence the choice of loss relief claim.

2

E3

Chargeable gains for companies

(c)

Explain and compute the treatment of capital losses.

1

Exam guide
Losses could form part of a 15 mark question or a 10 mark question in Section C. They may also be
included in Section A or B questions, for example dealing with carry forward loss relief. Dealing with
losses involves a methodical approach: first establish what loss is available for relief, second identify the
different reliefs available, and third evaluate the options. Do check the question for specific instructions;
you may be told that loss relief should be taken as early as possible.

1 Trading losses – overview
FAST FORWARD

Trading losses may be relieved by deduction from current total profits, from total profits of earlier periods
or from future trading income.
In summary, the following reliefs are available for trading losses incurred by a company.
(a)

Claim to deduct the loss from current total profits

(b)

Claim to deduct the loss from earlier total profits

(c)

Make no claim and automatically carry forward the loss to be deducted from future trading profits
of the same trade

These reliefs may be used in combination. The options open to the company are:
(a)

Do nothing, so that the loss is automatically carried forward against future trading profits

(b)

Claim to deduct the loss from current total profits, then automatically carry forward any remaining
unrelieved loss to be deducted future trading profits

(c)

Claim to deduct the loss from current total profits, then claim to carry any unused loss back and
deduct from earlier total profits, and then automatically carry any remaining unrelieved loss
forward to be deducted from future trading profits.

The reliefs are explained in further detail below.

Exam focus
point

Remember that total profits is income and gains before the deduction of qualifying charitable donations.
This may lead to qualifying charitable donations becoming unrelieved.

2 Carry forward trade loss relief
FAST FORWARD

308

Trading losses carried forward can only be deducted from future trading profits arising from the same
trade.

21: Losses  Part F Corporation tax

A company must deduct a trading loss which is carried forward against trading profits from the same
trade in future accounting periods (unless it has been otherwise relieved by making a claim to deduct it
from total profits). Relief is against the first available profits.

Question

Carry forward trade loss relief

A Ltd has the following results for the three years to 31 March 2016.

Trading profit/(loss)
Property income
Qualifying charitable donation

31.3.14
£
(8,550)
0
300

Year ended
31.3.15
£
3,000
1,000
1,400

31.3.16
£
6,000
1,000
1,700

Calculate the taxable total profits for all three years showing any losses available to carry forward at 1 April
2016 and the amounts of any qualifying charitable donations which become unrelieved.

Answer

Trading profits
Less carry forward loss relief

31.3.14
£
0

Property income
Total profits
Less qualifying charitable donation
Taxable total profits
Unrelieved qualifying charitable donation

0
0
0
0
0
300

Year ended
31.3.15
£
3,000
(3,000)
0
1,000
1,000
(1,000)
0
400

31.3.16
£
6,000
(5,550)
450
1,000
1,450
(1,450)
0
250

Note that the trading loss carried forward is deducted from the trading profit in future years. It cannot be
deducted from the property income.
Loss memorandum
Loss for y/e 31.3.14
Less used y/e 31.3.15
Loss carried forward at 1.4.15
Less used y/e 31.3.16
Loss carried forward at 1.4.16

£
8,550
(3,000)
5,550
(5,550)
0

3 Trade loss relief against total profits
FAST FORWARD

Loss relief by deduction from total profits is given before qualifying charitable donations and so qualifying
charitable donations may become unrelieved.

3.1 Current year relief
A company may claim to deduct a trading loss incurred in an accounting period from total profits. This
may make qualifying charitable donations unrelieved because such donations are deducted from total
profits after this loss relief to compute taxable total profits.

Part F Corporation tax  21: Losses

309

3.2 Carry back relief
FAST FORWARD

Loss relief by deduction from total profits may be given by deduction from current period profits and from
the previous 12 months.
Such a loss may then be carried back and deducted from total profits of an accounting period falling
wholly or partly within the 12 months of the start of the period in which the loss was incurred. Again,
this may cause qualifying charitable donations to be unrelieved.

FAST FORARD

A claim for current period loss relief can be made without a claim for carry back relief. However, if a loss is
to be carried back, a claim for current period relief must have been made first.
Any possible loss relief claim for the period of the loss must be made before any excess loss can be
carried back to a previous period.
Any carry back is to more recent periods before earlier periods. Relief for earlier losses is given before
relief for later losses.
Any loss remaining unrelieved after any loss relief claims against total profits is automatically carried
forward to be deducted from future profits of the same trade.

Question

Loss relief against total profits

Helix Ltd has the following results.
y/e
30.11.14
Trading profit/(loss)
Bank interest received
Chargeable gains
Qualifying charitable donation

22,500
500
0
250

y/e
30.11.15
£
(19,500)
500
4,000
250

Calculate the taxable total profits for both years affected assuming that loss relief by deduction from total
profits is claimed. Show the amount of any qualifying charitable donations which become unrelieved.

Answer

Trading profit
Investment income
Chargeable gains
Total profits
Less current period loss relief
Less carry back loss relief
Less qualifying charitable donation
Taxable total profits
Unrelieved qualifying charitable donation
Loss memorandum
Loss incurred in y/e 30.11.15
Less used:
y/e 30.11.15
y/e 30.11.14
Loss available to carry forward

310

21: Losses  Part F Corporation tax

y/e
30.11.14
£
22,500
500
0
23,000
0
23,000
(15,000)
8,000
(250)
7,750

y/e
30.11.15
£
0
500
4,000
4,500
(4,500)
0
(0)
0
0
0
250
19,500
(4,500)
(15,000)
0

If a period falls partly outside the prior 12 months, loss relief is limited to the proportion of the
period's profits (before qualifying charitable donations) equal to the proportion of the period which
falls within the 12 months.

Question

Short accounting period and loss relief

Tallis Ltd had the following results for the three accounting periods to 31 December 2015.

Trading profit (loss)
Building society interest received
Qualifying charitable donations

y/e
30.9.14
£
20,000
1,000
600

3 months to
31.12.14
£
12,000
400
500

y/e
31.12.15
£
(39,000)
1,800
0

Calculate the taxable total profits for all years and show any qualifying charitable donations which become
unrelieved. Assume loss relief is claimed by deduction from total profits where possible.

Answer

Trading profit
Interest income
Total profits
Less current period loss relief
Less carry back loss relief
Less qualifying charitable donations
Taxable total profits
Unrelieved qualifying charitable donations
Loss memorandum
Loss incurred in y/e 31.12.15
Less used y/e 31.12.15
Less used p/e 31.12.14
Less used y/e 30.9.14 £21,000  9/12 (max)
C/f

y/e
30.9.14
£
20,000
1,000
21,000

3 months to
31.12.14
£
12,000
400
12,400

21,000
(15,750)
5,250
(600)
4,650

12,400
(12,400)
0

0

y/e
31.12.15
£
0
1,800
1,800
(1,800)
0

0

0
0
0

500

0

£
39,000
(1,800)
(12,400)
(15,750)
9,050

Notes
1
2

The loss can be carried back to set against total profits of the previous 12 months. This means total
profits in the y/e 30.9.14 must be time apportioned by multiplying by 9/12.
Losses remaining after the loss relief claims against total profits are carried forward to set against
future trading profits.

3.3 Claims
A claim for relief by deduction from current or earlier period total profits must be made within two years of
the end of the accounting period in which the loss arose. Any claim must be for the whole loss (to the
extent that profits are available to relieve it). The loss can however be reduced by not claiming full capital
allowances, so that higher capital allowances are given (on higher tax written down values) in future years
(see later in this chapter).
Part F Corporation tax  21: Losses

311