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HMRC internal manual

Capital Gains Manual

Deferred consideration: unascertainable: election for treatment of loss - examples of set off of losses

The examples in the following paragraphs illustrate how the rules work in some of the more complex circumstances.

Example - priority of losses

Mr Smith disposes of an asset (the “original asset”) in Year 1 for consideration including a right to deferred unascertainable consideration, realising a chargeable gain for CGT purposes of £58,000. He has allowable losses on disposals of other assets in the same tax year of £12,000. He also has unused allowable losses brought forward from years before Year 1 of £33,000. After taking into account the annual exempt amount (AEA) for Year 1 (assumed in this example to be £7,000) he is liable to CGT on £6,000.

In Year 7 Mr Smith disposes of the right which he received on disposing of the original asset. The allowable loss accruing on the disposal is £15,000. No chargeable gains accrue to Mr Smith in Year 7. He elects under the new provisions to treat the loss as a loss of Year 1.

The other losses (total £45,000) must be deducted in priority to the £15,000 loss. Consequently only £13,000 (£58,000 - £45,000) of the loss of £15,000 is deducted from the chargeable gain in Year 1, leaving £2,000 (£15,000 - £13,000) to be carried forward and deducted from gains of Year 8 and, to the extent to which it remains unused, later tax years.

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Example - deducting losses from gains of more than one earlier year

Mrs Potter sells a piece of land she owns in three separate tranches, realising chargeable gains for CGT purposes as follows-

  • in Year 1, £100,000
  • in Year 2, £250,000
  • in Year 3, £75,000.

She also realises allowable losses in Year 2 of £225,000. The AEA for all 3 years is £7,000.

She receives a right to deferred unascertainable consideration on the disposal in Year 2 of the asset on which the gain £250,000 is realised. She disposes of the right in Year 6 and realises an allowable loss of £40,000 on the disposal.

Mrs Potter makes an election under the new provisions in relation to the allowable loss of £40,000. The loss is treated as a loss of Year 2. It cannot be treated as a loss of Year 1, because the right was conferred on Mrs Potter on the disposal in Year 2 and the loss may not be treated as a loss of a year earlier than the year in which the right was conferred.

The Year 2 chargeable gains remaining after deduction of the other allowable losses of that year, which are deducted in priority to the loss on disposal of the right, are £25,000. £25,000 of the total loss £40,000 is therefore deducted from the Year 2 gains and the remainder, £15,000, is carried forward to Year 3 and deducted from the chargeable gains for that year. The £15,000 loss may be deducted in this way because -

  • Mrs Potter made a disposal of the original asset in Year 3,
  • she is liable to CGT for that year,
  • the allowable losses brought forward from Year 2 may all be deducted from the chargeable gains of Year 3 without reducing the amount of the chargeable gains below the level of the AEA for Year 3 (£7,000).