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HMRC internal manual

Capital Gains Manual

ETMD: consequential amendments within TCGA 1992: - Sch 7A background

TCGA 92 Schedule 7A is designed to prevent capital loss buying. An example would be where company X, a member of the Z group, has realised capital losses of £150 and holds a chargeable capital asset, asset 3, whose market value is less than its cost. Company A, the principal company of the A group acquires company X and transfers to it a chargeable capital asset, 6, whose market value is greater than its cost. Company X then disposes of asset 6 and realises a gain of £250. At the same time company X disposes of asset 3 and realises a loss of £100. X sets the capital losses that it brought into the A group and the loss realised on the disposal of asset 3 against the gain realised on asset 6. Where the relevant conditions are met Schedule 7A would prevent this from happening. The realised capital losses and the latent losses in any assets that company X brought with it when it joined the A group , eg. asset 3, are ring fenced and can only be used against certain classes of assets. See CG45731 and CG45700+ for a fuller explanation on Schedule 7A. The assets brought into the group, eg asset 3, are referred to in Schedule 7A as pre entry assets but the schedule will only apply to them if a loss accrues on their disposal.

However Schedule 7A does not operate to restrict the use of all of the losses accruing on a pre entry asset. The schedule recognises that some of the loss may accrue after the company joins the group.

For example company X acquired asset 3 on 1/1/08 for £100 and when company X joined the A group on 1/1/10 the market value of asset 3 was £40. On 1/1/11 when company X disposes of asset 3 the proceeds were £25. Overall the loss on asset 3 is £75 and clearly part of that loss accrued during the period when company X was a member of the A group. Schedule 7A only restricts the use of those losses which accrued before company X joined the A group and the schedule provides company X with a choice in deciding what the amount of the restricted loss should be. By default the schedule will apportion the loss on a time apportionment basis, Schedule 7A(2), see CG47601. The total loss (75) is divide by the total period of time that company X held asset 3 (3 years), and that figure is multiplied by the period of time that it held asset 3 up to the time it joined group A (2 years). By this method you arrive at the amount of the pre entry loss and in this example this would be £50. (£75 x 2/3). That figure of £50 is the pre entry loss and that cannot be used against the gain accruing on the disposal of asset 6 but the balance, £25, can be.

Alternatively company X can elect to use the market value of asset 3 when it joined group A to determine the amount of the pre entry loss, Schedule 7A(5), see CG47720. The market value at 1/1/10 was £40 therefore the pre entry loss would be £60 (£100 - £40). Prima facia the market value alternative is less beneficial and ignoring all other factors it would appear to be in company X’s interest not to make a claim and allow the default position to apply.

The date at which company X joins the A group and therefore the date which is used to determine the amount of the pre entry loss, whether or not the default position applies, is referred to in Schedule 7A as the relevant event.