Utilising Capital Losses Tax Offsets

[Apple]

The solution to a multiple choice question confused me...

It asked why a company would sell an asset only to buy it back a few months later at a similar price. The solution was to use a tax Offset that would otherwise not get used.

On sale of the asset a capital gain is realised, so the company can offset this with capital losses. But if they don't sell the asset in the first place, won't the tax be lower?

Thanks

 

[didster]

I think you're right in that if you never sell the asset your overall capital gains would be lower and in most cases you'll have a lower tax liability.

However, you may still want to try this approach especially if you have a net capital loss which cannot be utilised in future years. If you don't use it you lose its value (in reducing tax)

In all likelihood, you would need to sell the asset at some point and once it doesn't cost you too much (paying tax earlier, transaction costs, volatility in price you would buy it back for, etc) it may be worth it.

I think you're more likely to do this if:
a) you have a net capital loss which can be offset (partly) by capital gains on this investment to remove the tax that would be paid on these capital gains (eventually)
b) you expect to have to sell the asset in the near future at a time where your net capital gains may be positive (at which point your tax liability would be higher)

 

[Apple]

Thanks

That makes me think of the answer to another multiple choice, where you can offset capital losses in any future year, so I don't understand why it would be lost/unavailable if it isn't utilised immediately.

I think I see now the advantage of sale and repurchase, so the capital gain will be cancelled out via the offset...so in the future any further capital gain would be lower.

 

[didster]

I'm certainly not an UK tax expert, but was under the impression that capital losses can't be used to offset capital gains for tax purposes in any year in the future.

Personally, I don't see the tax authorities being prepared to allow capital losses to roll over 20, 30 years in the future.

Even if UK tax laws allow this indefinately, CT2 is not supposed to be UK specific, so the particulars of UK tax shouldn't be examinable. Also general principles that coincidently do not apply in UK may be examinable in my opinion.

 

[Apple]

Yes I know what you mean re UK specific, that point seems hammered home in many of the exams, but lots of CT2 core reading is UK specific.

The future year thing is the anwser to one of the multiple choice questions, Question 4 April 2002, where the correct answer is B, which is the any future year option.