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HMRC internal manual

Capital Gains Manual

Administration: losses: targeted rules to prevent the contrived creation of capital losses by companies - example 1

A group consists of parent company P Ltd and subsidiaries R Ltd and S Ltd. S Ltd, aninvestment company, is standing at a loss. P Ltd incorporates a new subsidiary T Ltd whichis a company limited by guarantee. T Ltd acquires all the share capital of S Ltd, atransaction to which the provisions of TCGA92/S171 cannot apply since T Ltd cannot be amember of the CG group. In the absence of the legislation in TCGA92/S8 amended by FA 2006(TCGA92/S16A with effect from 6 December 2006 – see CG40241) a loss accrues to P Ltdon the disposal of S Ltd to T Ltd. However, as the disposal of S Ltd takes place directlyin consequence of arrangements, one of the main purposes of which is to secure a taxadvantage by crystallising the loss on the investment in S Ltd, the loss accruing to P Ltdis not an allowable loss.

In this example the loss is not an allowable loss as the arrangements have a main purposeto secure a tax advantage. There is no real disposal of S Ltd by P Ltd since T Ltd iswholly owned by P Ltd and has been included in the arrangements primarily because it fallsoutside of the capital gains group headed by P Ltd, thus triggering a disposal for taxpurposes (“artificial de-grouping”). This contravenes the principle in the HMRCstatement (see CG40240 and appendix 8) that capital loss relief should only be availablewhere there has been a genuine commercial disposal.