Capital Gains Tax – The Consequences Of Debt Write Off

Up until recently the calculation of capital gains tax arising on the disposal of an asset has been relatively straight forward.  A profit generated by an excess of sales proceeds over the original purchase price of the asset was subject to capital gains tax (rate is currently 33%).

What Has Changed

Section 42 of Finance (No. 2) Act 2013 was recently introduced to address situations where an individual or a company had borrowed to finance the purchase of an asset and had subsequently sold the asset and part of the debt used to purchase the asset has been written off.  The aim of this section is to ensure the base cost for capital gains tax purposes reflects the real economic cost of the asset.


The section is applicable in circumstances where the following occurs:

  • The disposal of an asset gives rise to a capital gains tax loss
  • The acquisition cost has been financed directly or indirectly by way of debt and
  • The debt relating to the acquisition cost is released or subsequently released.

How it works

The section works by reducing the base cost of the asset disposed by the lower of

  • The amount of the debt written off or
  • The amount of the capital gains tax loss calculated before any base cost adjustment.

The calculation of the capital gains tax position will be dependent on whether the debt is written off in a period prior to the disposal, in the same period as the disposal or in a period after the disposal of the asset.

In situations where the debt is written off prior to the asset being sold or in the same period of the asset being sold the base cost in the capital gains tax computation is adjusted as above.

In situations where the debt is written off in a period subsequent to the disposal the capital gains tax computation is prepared as usual which will result in a capital gains tax loss.  In the subsequent period when the debt is released there is a deemed disposal in that period equal to the amount of the reduction in the base cost that would have applied had the write off been given in the same period as the disposal.


The restriction only applies to disposals made on or after 1 January 2014 and the restriction should not apply so as to turn a capital gains tax loss into a gain.  However taxpayers should be aware that where a loss generated by a disposal is used to shelter other gains arising, the release of a debt in a subsequent period will give rise to a capital gain for which shelter may not be available.

Efficient Tax Planning Is Crucial

Capital gains tax rates have increased steadily over the last number of years and it is now an area where efficient tax planning can reduce exposure to significant tax liabilities going forward.

What Questions Do You Have?

We are happy to help. Please post your comment below or call Eamonn Madden, Tax Manager at Cooney Carey, on 01 677 9000. Alternatively, send him an email: emadden@cooneycarey.ie

If this article helped you, please share it with other businesses.