31 March 1982 valuation

A client has recently undertaken the disposal of a property. The property was acquired in 1979 for £128,365 and the base cost was reduced by £44,203 for rollover relief claimed. There was a substantial increase in the value of the property shortly after acquisition and this is reflected in the 31 March 1982 valuation of the property of £195,000. In computing the gain we propose to adopt a 31 March 1982 value. The property was sold for just less than £350,000 during 1998-99.
We believe that the 31 March 1982 value does not require to be reduced by the gain rolled over but would welcome readers' views. A rebasing election is not in force.
(Query T15,675) Clarity.


Answers:
The rebasing provisions of section 35 of, and Schedule 4 to, the Taxation of Chargeable Gains Act 1992 are clear. The relevant asset will be revalued to market value at 31 March 1982. There is no need to deduct the rolled over gain from the resultant value since the effect of rebasing is to increase the capital gains tax cost to the 31 March 1982 value. The base cost was £84,162 (£128,765 — £44,203), it is now £195,000; with indexation that should result in no tax arising. As no election has been made for 31 March 1982 value to apply, the alternative kink test computation, using original cost (as reduced by rollover), needs to be prepared but since it gives a higher gain it will not apply. The position is confirmed by the Revenue's Capital Gains Tax Manual at paragraph 16745 which contains the following example, which fits the circumstances of 'Clarity':

Example
Asset A was sold in 1980 for £1,000 realising a gain of £500.
Asset B was acquired in 1981 for £2,000 and a section 115, Capital Gains Tax Act 1979 (now section 152, Taxation of Chargeable Gains Act 1992) roll-over relief claim was made reducing its cost for capital gains tax purposes to £1,500.
Asset B was sold in April 1992 for £8,000. The market value of asset B at 31 March 1982 was £3,000.

Rebased gain
Disposal proceeds £8,000
less Cost (market value at 31 March 1982) £3,000
Unindexed gain £5,000
less Indexation 3,000 × 0.747 £2,241
Gain £2,759

Note: No adjustment is made to the 31 March 1982 market value of asset B for the gain on asset A which was rolled over before 31 March 1982 against the cost of asset B.

Gain on old rules
Disposal proceeds £8,000
less Cost 1981 £2,000
Deduct gain on asset A
rolled over £500 £1,500
Unindexed gain £6,500
less Indexation 3,000 × 0.747 £2,241
Gain £4,259
Chargeable gain £2,759

If the gain arose after 31 March 1982 but before 6 April 1988, and related in part to ownership before 31 March 1982, then only 50 per cent of the rolled over gain escapes tax free. There will be a need to agree the 31 March 1982 value by use of the CG34 procedure. Finally, as the gain arose in 1998-99, there is late notification. However, provided the suggested 31 March 1982 value is sound, this should not have any serious consequences. — Rookery.

Where rollover relief is claimed in respect of a gain arising on a disposal, the amount rolled over results in an equivalent deduction from the cost of the replacement asset.
However, in the case of 'Clarity's' client, the replacement property was acquired in 1979 and when calculating the gain on the disposal in 1998-99, it is proposed that the value at 31 March 1982 should be used. Where a March 1982 value is to be used, section 35(2), Taxation of Chargeable Gains Act 1992 requires the taxpayer to make the assumption that the asset in question was sold and immediately reacquired at its market value on that date.
As a result of this assumption, the rolled over gain falls out of account and the deduction against the proceeds of approximately £350,000 is simply the value of £195,000.
After adding on a deduction for indexation allowance from March 1982 to April 1998 in respect of the March 1982 value of £195,000, the gain on the sale of the property will be reduced to nil. — Hodgy.