Unusual capital gains in plant and machinery: A transaction to watch out for

published on 28 August 2025 | reading time approx. 2 minutes

As corporation tax compliance advisors, we are used to spotting patterns, applying rules, and navigating well-established tax principles. But every so often, a case arises that challenges expectations and reminds us why close scrutiny of tax computations is essential. Recently, we encountered one such anomaly: a capital gain arising on the disposal of plant and machinery (P&M) – an area where capital gains are not typically expected.

A rare capital gain in familiar territory

Ordinarily, plant and machinery are dealt with under the capital allowances regime rather than the capital gains tax (CGT) framework. Expenditure on qualifying assets are pooled, and writing down allowances are applied annually to reflect depreciation for tax purposes. When an asset is disposed of, the proceeds are deducted from the pool (capped at the original cost), and any remaining balance may result in a balancing charge or allowance, depending on the circumstances.

It is widely assumed that no capital gains implications arise on the disposal of such assets. But in this particular case, the disposal proceeds exceeded the original cost of the asset.

The case in point

A client had originally acquired a piece of machinery for £88,000. Full capital allowances had been claimed on this through the annual investment allowance mechanism. The asset was subsequently sold for £190,000 a couple of years later.

From a capital allowances perspective, the entire £88,000 cost had already been claimed. The disposal proceeds (£190,000) led to impact one; being a balancing charge of £88,000 (the cap of the asset cost) – recovering the full relief claimed.

But what about the remaining £102,000 of the proceeds?

This is where capital gains tax principles step in, for impact two. Since the proceeds exceeded the original cost of the asset, a capital gain also applies. The excess of £102,000 (the proceeds amount above the cost) in this case is treated as a chargeable gain, despite the fact that the asset was within the capital allowances regime.

This may come as a surprise to many, as its often assumed that the tax implications in this scenario confined solely to the capital allowances there is an assumption that all tax consequences in this situation are limited to the capital allowances pool. But the legislation is clear: where disposal proceeds exceed the original cost, the excess is treated as a capital gain, even for assets like P&M that are not typically associated with CGT.

There are few specific exemptions from capital gains such as certain assets with proceeds of less than £6k and cars (but not business use vehicles such as vans, lorries etc.).

Lessons Learned

This case highlights a few key takeaways for corporation tax compliance professionals:

Always compare disposal proceeds to original cost, not just to tax written-down value.
Where proceeds exceed original cost, be alert to the potential for a dual tax consequence being a reduction in the general pool/balancing charge (up to the original asset cost) and a potential capital gain.
Document and track original cost clearly, this is especially important when assets are acquired as part of a broader transaction or in foreign currencies.

Final Thoughts

This unusual transaction served as a timely reminder that assumptions in tax can be risky. While plant and machinery disposals are typically straightforward from a compliance perspective, there are edge cases where capital gains can unexpectedly arise. By maintaining a critical eye and understanding the nuances of the legislation, we can ensure accurate tax computations and help clients avoid surprises.