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Loss limitation rules

Limitation on ‘Phantom Losses’

The loss-limiting formula ‘proceeds less post-valuation date expenditure’ will always result in a no gain or loss situation. In order to understand this formula it is necessary to begin with the core base cost formula:
 
Base cost = valuation date value (VDV) + post-valuation date expenditure
 
A no gain or loss situation arises when:
 
Base cost = Proceeds.
 
This can be restated as:
 
VDV + post-valuation date expenditure = Proceeds
 
And then rearranged as :
 
VDV = Proceeds – post-valuation date expenditure
 
Essentially the ‘proceeds less post-valuation date expenditure’ formula works backwards to arrive at a VDV that will yield neither a gain nor a loss after the post-1 October 2001 expenditure is added to it.

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