This Practice Note sets out how the capital allowances rules interact with the rules relating to: • capital gains tax, including corporation tax on chargeable gains (CGT) • value added tax (VAT), and • stamp taxes, namely: ◦ stamp duty land tax (SDLT) in England and Northern Ireland ◦ land and buildings transaction tax (LBTT) in Scotland, and ◦ land transaction tax (LTT) in Wales It is a common misconception that claiming capital allowances for plant and machinery will reduce the CGT base cost of an asset and hence increase any gain. This is not true—claiming plant and machinery allowances does not reduce a taxpayer’s CGT base cost in a capital asset (otherwise, it would result in double taxation, with previously given relief unwinding and a gain increasing). However, a claim for these allowances may restrict the extent to which any capital losses are allowable upon a subsequent disposal. The impact of VAT on capital allowances is sometimes overlooked by taxpayers or their advisers.

CAPM involves the application of a theory that the return a pension fund should expect from an investment is the result of the expected return on cash in the bank plus the extra return from the market as a whole in excess of that from cash, but adjusted for the sensitivity of the investment to general movements in share prices. It also assumes that the market gets it right, ie that the market reflects the true price of the investment.

Every investor in a equity'>private equity fund commits to investing a specified sum of money in the fund partnership over a specified period of time. The fund records this as the limited partnership’s capital commitment.

Arises when an irrevocable gift has been made to a company by a shareholder. This was relatively rare in the past, but now arises quite commonly where a parent company makes a long term loan to a subsidiary at a below market rate of interest. The difference between the face value of the loan, and its discounted value using a market rate of interest, is required to be credited to a capital contribution reserve.

Also known as ‘distribution’. These are the returns that an investor in a equity'>private equity fund receives. It is the income and capital realised from investments less expenses and liabilities. Once a limited partner has had their cost of investment returned, further distributions are actual profit. The partnership agreement determines the timing of distributions to the limited partner. It will also determine how profits are divided.

Capital expenditure describes spending on acquiring, improving or extending the useful life of fixed assets (for example, land, buildings, plant, equipment or significant IT systems), as opposed to day‑to‑day operating or revenue expenditure. In legal practice, it is a core concept in corporate, finance, tax, commercial property and public sector documentation.The term is not defined in a single overarching statute; instead, its meaning is derived from accounting principles and specific legislation, particularly tax legislation (for example, rules on capital allowances and deductions). Courts in the UK and Ireland have developed case law distinguishing capital from revenue expenditure, focussing on the nature and enduring benefit of the asset or enhancement.Capital expenditure provisions frequently appear in: financial covenants and baskets in loan agreements; restrictions and consent requirements in shareholders’ agreements and joint venture agreements; landlord and tenant clauses on service charge and repairs; project finance budgets; and corporate governance and approval matrices.Usage and underlying principles are broadly consistent across England and Wales, Scotland, Northern Ireland and Ireland, though practitioners must apply the term by reference to the relevant jurisdiction’s company, tax and accounting rules and any defined term in the particular contract or statute.

What is capital finance and why does it matter? Capital finance differs from revenue finance as revenue expenditure has to be met from current income whereas capital expenditure can be met by borrowing or capital receipts and the costs can be spread over the period in which the benefits of the expenditure are expected to accrue. The current system, generally referred to as the Prudential Framework (for England and Wales), is found in Part 1 of the Local Government Act 2003 (LGA 2003). It is a framework that encourages investment in the capital assets that local government needs to improve services and relies on accounting concepts, including professional and self-regulation. It allows local authorities (LAs) to raise finance for capital expenditure, without government consent, where they can afford to service the debt without extra government support. Low interest rates between 2010 and 2022 have encouraged LAs to borrow from the Public Works Loan Board (PWLB) and other lending institutions to fund both regeneration and renewal schemes, as well as property investments designed to secure regular income flows

When an asset is sold for more than the initial purchase cost, the profit is known as the capital gain. This is the opposite to capital loss, which occurs when an asset is sold for less than the initial purchase price. Capital gain refers strictly to the gain achieved once an asset has been sold—an unrealised capital gain refers to an asset that could potentially produce a gain if it was sold. An investor will not necessarily receive the full value of the capital gain—capital gains are often taxed; the exact amount will depend on the specific tax regime.

Companies that are members of the same capital gains group may transfer assets between themselves free of corporation tax on chargeable gains (CGT), see Practice Note: Capital gains—intra-group asset transfers. Anti-avoidance provisions are needed to prevent groups from using these rules to avoid tax when they wish to sell assets that would otherwise incur a large CGT bill. Instead of selling the asset directly, companies would be able to transfer the asset intra-group, probably to a company that had been specially set up for the purpose, and then sell the shares in the new company. This is known as the envelope trick and is described in more detail below. The provisions that prevent companies from using the envelope trick are known as the degrouping rules and are found in section 179 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). The capital gains degrouping rules apply even when no avoidance is intended. There is a risk that the degrouping rules may apply without the relevant companies' knowledge (until after the event). This is particularly so given

The capital gains legislation includes specific provisions for persons who are connected with one another. These provisions can be divided into two broad groups: • rules for transactions between connected persons, and • rules that effectively treat a taxpayer and persons connected with the taxpayer as a single economic unit The provisions that form the first of these categories (rules for transactions between connected persons) include the market value rule, a restriction on the use of capital losses, and rules on linked transactions, all of which are described below. The purpose of these provisions is to prevent taxpayers from manipulating the capital gains rules, for instance by creating artificial capital losses by transferring an asset for little or no consideration to a family member or to a company under the taxpayer's control. The second category (rules that treat a taxpayer and connected persons as a single economic unit) appear throughout the capital gains legislation. An example is in the value shifting rules, which apply where a tax-free benefit has been conferred either on a

Tax that is payable on the capital gain of an investment following its sale at a profit. UK pension funds are exempt from CGT.

Capital gains tax is a tax on the profit that arises when a person disposes of an asset that has increased in value.