Finance (No. 2) Act 2013 introduced provisions to ensure losses calculated for CGT purposes reflect the release of debt used to finance the acquisition of the asset, in an attempt to provide that the tax treatment of transactions reflect the economic reality of such transactions.

Where an asset is purchased with borrowed funds and the borrower has been released from repaying some of the debt, the new rules say that, because debt is released, part of the cost of the asset was not in reality borne by purchaser. On this basis, the new rules deny a deduction in computing an allowable loss for CGT purposes for any element of debt write off.

The rules take account of disposals where debt is released in a tax year after the asset disposal. Where borrowings are released in a tax year subsequent to the year in which the asset is sold, meaning that the base cost would not have been restricted at the time of calculating the loss on the disposal, a chargeable gain is deemed to arise to the borrower in the tax year in which the debt is forgiven. The chargeable gain is equal to the amount of the debt released in the later tax year.



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