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Chargeable Gains for IndividualsSection BCGTIncorporation Relief

ACCA · Question 18 · Chargeable Gains for Individuals

Section B: Case 1 - Vanguard Robotics

Scenario: Vanguard Robotics was run as a sole trade by Liam, developing specialized robotic arms for manufacturing. Liam prepared accounts to 31 December each year. On 30 September 2023, Liam ceased trading as a sole trader and transferred the entire business as a going concern to a newly formed company, Vanguard Robotics Ltd, in exchange for shares.

Question: On incorporation, Liam transferred chargeable assets with a market value of £400,000 (original cost £150,000). The total market value of all business assets transferred was £600,000. In exchange, Vanguard Robotics Ltd issued 10,000 £1 ordinary shares to Liam (market value £500,000) and paid him £100,000 in cash.

What is the base cost of Liam's shares in Vanguard Robotics Ltd after applying Incorporation Relief (s.162)?

Answer options:

A.

£250,000

B.

£291,667

C.

£500,000

D.

£350,000

How to approach this question

Calculate the total gain on the chargeable assets. Determine the proportion of consideration received in shares. Roll over that proportion of the gain against the market value of the shares.

Full Answer

B.£291,667✓ Correct
1. Calculate total gain on chargeable assets: £400,000 - £150,000 = £250,000. 2. Calculate proportion of consideration in shares: £500,000 (shares) / £600,000 (total consideration) = 5/6. 3. Calculate gain rolled over: £250,000 x 5/6 = £208,333. 4. Calculate base cost of shares: Market value of shares (£500,000) - Gain rolled over (£208,333) = £291,667. The remaining gain of £41,667 (£250,000 - £208,333) is immediately chargeable to CGT.

Common mistakes

Rolling over the entire gain against the shares, ignoring the cash element.
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