I am advised by the Revenue Commissioners that the writing-down of debt in respect of persons who are insolvent does not constitute a disposal of an asset for capital gains tax purposes and does not, therefore, give rise to a capital gains tax charge.
Section 552 of the Taxes Consolidation Act 1997 sets out the rules for determining the allowable base cost of an asset for the purposes of calculating any chargeable gain or allowable loss on the disposal of the asset. The objective of the section is to ensure that the full amount of the cost actually incurred on the acquisition of the asset is allowed.
Section 552 was amended by section 42 of the Finance (No. 2) Act 2013 to ensure that only the real economic capital cost of the asset to its owner is allowed as a deduction in the computation of a chargeable gain or allowable loss on a subsequent disposal. The amendment confines the allowable cost of an asset, in the computation of any chargeable gain or loss arising on its disposal, to the actual cost incurred on the acquisition of the asset. Accordingly, where an asset had been acquired with borrowings from which the borrower has been in whole or in part released from repaying, that part of the cost not actually incurred, is not allowable in computing an allowable loss or a gain. This is to ensure that a person cannot claim the benefit of a base cost that has not, in fact, been incurred. The amendment also provides that, where a debt is forgiven in a year of assessment after the asset is disposed of such that the base cost of the asset will not have been reduced by the amount of the debt at the time of computing the gain or loss on the disposal, then a chargeable gain equal to the amount of the debt released is deemed to accrue in the year of assessment in which the debt is released.
