The s.198 CAA 2001 election should not affect your CGT calculations unless the property is being sold at a capital loss.
The company will pay corporation tax on the gain as calculated below:
Proceeds 500,000
Less costs of sale (TBC)
Less purchase price (420,000)
Less costs of acquisition (TBC)
Less indexation (as frozen at December 2017) (TBC)
Chargeable Gain 80,000
As you can see, the £75,000 under the election does not affect this calculation.
Remember that the costs of fixtures in the building are still capital costs of the building, being enhancement expenditure within s38 TCGA 1992. These costs are not excluded if they otherwise would be by s39 TCGA 1992 – s41(1) TCGA 1992. The costs of the fixtures added to the building by your client will therefore be included in the “costs of acquisition” above. The sale consideration for the building does not exclude consideration relating to plant and machinery within that building – s37(2) TCGA 1992.
However, if the above calculation produced a loss, any allowable expenditure in calculating that loss must be reduced by the amount of capital allowances actually given to the company on the fixtures and thus the allowable loss would be restricted – s41(2) TCGA 1992.
You would need the history of the capital allowances claimed in respect of the fixtures, as you need to know the cost of the fixtures for which capital allowances have been claimed. However, such a history would have been part of the work required to enable your client to enter into an election under s198 CAA 2001 and so will be readily available.
There is a good example at: Direct Tax Reporter CAPITAL ALLOWANCES 238-500 PLANT AND MACHINERY: PARTICULAR ASSETS AND ACTIVITIES 243-700 PROPERTY TRANSACTIONS 244-350 Capital gains tax implications. This section also has useful guidance on the capital allowances elections from both the buyers and seller’s perspectives as well as how to apply the legislation dependent on the history of the ownership of the building.
HMRC’s guidance can be found at: CG15410 – Capital allowances: assets disposed of at a loss
The indexation up to December 2017 can be found at: https://www.gov.uk/government/collections/corporation-tax-on-chargeable-gains-indexation-allowance-rates
The effect of the s198 election is that the company will need to bring a disposal value of £75,000 into their capital allowances computation, which may reduce their Tax Written Down Value or create a balancing charge.
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