Capital allowances are the practice of allowing a company to get tax relief on tangible capital expenditure. You allow expenses against its annual pre-tax income.
Capital allowances on worthless assets and negligible value claims
The value of the asset becomes negligible where an asset is lost or destroyed. It’s possible to take advantage of an allowable loss for capital gains tax purposes. The loss is an allowable loss if any gain on the disposal of the asset is a chargeable gain.
A distinction is set between assets that no longer exist. That’s the asset that has negligible value.
Capital allowances on assets (knockdown or missing)
Entire loss, destruction, dissipation, or extinction of an asset serves as disposal. It’s regardless of all the compensation received.
The resulting loss is allowable for capital gains tax purposes. When there’s compensation, it’s considered as proceeds from the disposal.
Negligible value claim
If the asset still exists but has become of negligible value, as long as one of two conditions – A or B – is met, a negligible value claim is made by the owner of the asset.
The legislation does not define ‘negligible’ but HMRC takes the view that it means that is worth ‘next to nothing’.
Condition A is that the asset is negligible while still owned by the person.
Condition B is that:
- The disposal by which the person acquires the asset was a no gain/no loss disposal (as is the case between spouses and civil partners)
- At the time of that disposal, the asset was of negligible value
- Between the time when the asset became of negligible value and the disposal by which the person acquired it, any other disposal of the asset was on a no gain/no loss basis
The asset must still exist
For a negligible value claim to succeed, the asset must exist where the claim takes place. If the asset ceases to exist, for capital gains tax purposes, there’s actual disposal of the asset.
No time limit
There’s no time limit for a negligible value claim. However, the asset must be of negligible value at the date of the claim.
The claimant must demonstrate the asset to become of negligible value. while owned by them; or were acquired from a spouse/civil partner in a no gain/no loss disposal, while owned by their spouse/civil partner. Evidence should be retained to support the claim.
Effect of a successful claim
A successful negligible claim gives rise to the disposal of the asset. The asset immediately reacquires for the amount mention on the claim. The loss on the deemed disposal is an allowable loss. A layout that gains arising on the disposal of the asset for allowable loss.
Please consider that the allowable mislaying arises from the deemed disposal rather than from the negligible value claim itself.
In certain circumstances where the claim relates to qualifying shares, the loss can be set against income.
Additional note: TCGA 1992, s. 24.