Introduction to this document

Option for special method of cost apportionment

If you sell a piece of land which is part of a larger estate, a little known concession could save you some tax.

General rule

The general rule for any part disposal of an asset is that the amount of the original cost attributable to the part sold is determined by the following formula:



A = the proceeds received for the part disposed; and

B = the market value of the unsold part.

In most cases, this general rule will produce a result that is logical; however, in some circumstances it will not reflect the true picture, for example where the costs attributable to a particular part of the estate are greater than others.

Example. A farmer purchases neighbouring land of 200 acres for £600,000. Some time later he incurs £100,000 on drainage for a specific 50 acre part of it. After several years he disposes of ten fields totalling 20 acres for £120,000. These were all part of the area subject to the drainage work.The unsold 180 acres are worth approximately £1.08 million. Applying the general rule, the allowable cost would be 10% of the original cost, plus 10% of the enhancement expenditure spent on the drainage, i.e. £70,000, giving a chargeable gain of £530,000. This does not take account of the fact that additional expenses were focused on just one quarter of the estate.


Special method

Where the part being disposed of is capable of being identified as an asset in its own right, it is possible for you to opt to set the general rule aside and instead calculate the allowable cost on any basis that is “just and reasonable”. This has been available since 1971, and is set out in HMRC’s Statement of Practice D1.

Example. To illustrate, let’s reconsider the farmer. Rather than using the general rule, he could propose to use 20/200 x £600,000 of the original cost, as well as a more representative 20/50 x £100,000 of the enhancement expenditure. This would give an allowable deduction of £100,000, reducing the gain to £500,000.


Making the election

The election to use a special method should be made in writing, either in a letter or in the additional information space on the capital gains summary pages of the tax return. You must include a description of the means by which you have arrived at the deductible cost for the part disposal and a calculation.

Time limit

The election can be made up until the fourth anniversary of the end of the tax year the disposal occurred in.