What is the wasting asset exemption for CGT?

Here is a comprehensive answer on the wasting asset exemption for CGT:

What the law says

Definition of a wasting asset (TCGA 1992, s.44)

A "wasting asset" is an asset with a predictable life not exceeding 50 years, subject to the following rules:

• Freehold land is never a wasting asset, regardless of its nature or any buildings on it.
• For tangible movable property, "life" means useful life, having regard to the purpose for which the asset was acquired.
• Plant and machinery is always treated as having a predictable life of less than 50 years (i.e., always a wasting asset).
• A life interest in settled property is not a wasting asset until the life tenant's predictable life expectancy is 50 years or less (determined from actuarial tables approved by HMRC).

The predictable life and residual/scrap value are assessed as they were known or ascertainable at the time of acquisition.

The exemption (TCGA 1992, s.45)

Under s.45(1), no chargeable gain accrues on the disposal of (or an interest in) an asset that is:

1. Tangible movable property (a chattel), and
2. A wasting asset.

Exceptions — the exemption does NOT apply where:

• (s.45(2)(a)) The asset has been used solely for the purposes of a trade, profession or vocation throughout the period of ownership, and the person has claimed (or could have claimed) capital allowances on expenditure attributable to the asset; or
• (s.45(2)(b)) The person has incurred expenditure on the asset that has otherwise qualified in full for capital allowances.

Partial use for trade / partial capital allowances (s.45(3)): Where an asset has been used partly for trade and partly for other purposes, or has only partly qualified for capital allowances, the consideration and expenditure are apportioned. The exemption applies only to the non-business/non-capital-allowances portion; any gain on the business/capital-allowances portion remains chargeable.

Anti-avoidance: asset used as plant by another person (s.45(3B)): The exemption is also disapplied where, during the period of ownership:

• The asset is used for the purposes of a trade carried on by another person,
• As a result of that use it becomes plant, and
• But for being treated as plant (and therefore a wasting asset under s.44(1)(c)), the disposal would not be of a wasting asset.

This amendment took effect for CGT purposes for disposals on or after 6 April 2015.

Terminal market dealings (s.45(4)): The exemption does not apply to disposals of commodities by a person dealing on a terminal market.

Wasting asset cost restriction (TCGA 1992, s.46)

Even where the full exemption does not apply, the allowable acquisition cost is restricted (written off) over the predictable life of the asset. The cost is reduced by the residual/scrap value, and the balance is written off on a straight-line basis over the asset's life; only the unwritten-off portion is deductible at the date of disposal.

Capital allowances override (TCGA 1992, s.47): Where a wasting asset has qualified in full for capital allowances throughout the period of ownership, the gain or loss is computed as if the asset were not a wasting asset (i.e., no cost write-down applies).

HMRC guidance / practice

HMRC summarises the three conditions that must all be met for the s.45(1) exemption to apply:

1. The asset is tangible moveable property (a chattel),
2. It has never qualified for capital allowances, and
3. It has not been used as plant in another person's trade (s.45(3B)).

HMRC notes that where plant and machinery is a chattel and the disposal consideration is less than £6,000, any gain is exempt under the separate chattel exemption (s.262) regardless of whether capital allowances were claimed — so the wasting asset exemption analysis may be unnecessary in those cases.

HMRC explains the rationale for the cost write-down rule: a wasting asset gradually becomes valueless or worth only scrap value over time, so the expenditure attributable to the "wasted" portion is excluded from allowable expenditure.

HMRC also confirms that where a wasting asset qualifies in full for capital allowances, s.47 applies to compute the gain as if the asset is not a wasting asset, but s.41 (restriction of losses by reference to capital allowances) still applies in the normal way.

Summary table