CG47000 - Companies and groups of companies: groups of companies: restrictions on capital losses
Background
There are restrictions on the use of allowable losses when companies move between groups. The rules were originally introduced in 1993 to counter “loss-buying”. At its most extreme that is where a profitable group acquires a company with no assets but has realised substantial capital losses. When the group realises capital gains these can be transferred to the company with losses under TCGA92/S171A.
Similarly, it would be possible for a group to sell a subsidiary that is to realise a gain to another group with surplus losses, known as “gain-buying”.
The development of legislation
introduced S177A and Schedule 7A TCGA to address loss-buying. This applies restrictions to the use of “pre-entry losses” where a company becomes a member of another group. Such losses can only be set against “pre-entry gains” which are principally gains on assets the company held before it joined the group or those on assets acquired for use in a trade that it was conducting before joining. A portion of a loss on an asset that was held by the company at the point it changed group was also a pre-entry loss. The apportionment being made on the basis of time with the option to elect for one to be made based on the market value of the asset at the time of the change in ownership.
introduced S177B and Schedule 7AA to address gain-buying. It operated in a broadly similar way to Schedule 7A.
introduced S184A to S184F which constitute Targeted Anti-Avoidance Rule (TAAR) that prevents the use of capital losses where a company changes ownership where a main purpose of acquiring the company is to obtain a tax advantage. The introduction of this purpose-based TAAR allowed the gain-buying rule in Schedule 7AA to be repealed. However, Schedule 7A was retained to provide the streaming of losses.
included various simplification measures for the capital gains group rules. These included removing those parts of Schedule 7A that were no longer considered necessary following the introduction of the TAAR.
Archived guidance
The guidance on loss- and gain-buying was reviewed in 2019 and certain material archived. This can be accessed through earlier versions of the HMRC website held by the National Archives. CG10100 explains how to do this.
Original CG47000
There is no form of group relief for the capital losses of companies. A company can surrender trading losses and other items to another company in the same group, see CT2670. But a company cannot surrender its allowable capital losses for set-off against the chargeable gains of another group member. Groups can however take advantage of the no gain/no loss rule for intra-group asset transfers, see CG45305, to achieve much the same result. A group can transfer an asset with a latent gain at no gain/no loss to a group company with a realised loss, and then sell the gain asset outside the group. The gain crystallises in the company with the allowable loss, and the loss is set off against the gain. Alternatively, a group can transfer an asset with a latent loss at no gain/no loss to a company with a chargeable gain, and then crystallise the loss in the gain company. Here too the result is to bring together in one company an allowable loss and a chargeable gain. Provided the gain crystallises in the same accounting period as the loss, or in a later accounting period to which the loss is carried forward, the tax charge is only on the net gain, if any.
Original CG47001
Before FA93, it was possible for groups to exploit the no gain/no loss rule and effectively buy capital losses from other groups, without any restriction on how the losses could be used.
EXAMPLE 1: PURCHASE OF REALISED LOSS
Group M has a subsidiary MA which will shortly sell an asset and realise a chargeable gain of £10M. A wholly unrelated group L has a subsidiary LV with a realised allowable loss of £10M which group L cannot use. Group L sells the loss vehicle LV to the M group for £1M. MA transfers the gain asset to LV at no gain/no loss. LV sells the gain asset to an unconnected third party, and realises the chargeable gain of £10M. This gain is sheltered by LV's loss £10M.
In this way the M group has obtained the benefit of a capital loss which accrued on adisposal by a different group altogether.
EXAMPLE 2: PURCHASE OF UNREALISED LOSS
Group M has a subsidiary MA which will shortly sell an asset and realise a chargeable gain of £15M. An unrelated group L has a subsidiary LV, and LV holds a valueless asset with an unrealised loss of £15M. Group L sells the loss vehicle LV to the M group for £1.5M. LV transfers the loss asset at no gain/no loss to MA. Company MA sells the gain asset to an unconnected third party, realising the chargeable gain of £15M, and makes a negligible value claim under TCGA92/S24 (2) in respect of the loss asset, realising an allowable loss of £15M.
The M group has obtained the benefit of a capital loss attributable to the reduction in value of the loss asset at a time when it was owned by a different group altogether.
Finance Act 2000 changes
FA2000/SCH29/PARA1 removed the UK residence restriction for group membership. For the purposes of the loss buying provisions of TCGA92/SCH7A, FA2000/SCH29/PARA7 provides that from 21 March 2000 the group to be considered in deciding whether a company has joined a group is the worldwide group, without any residence restrictions on membership. FA2000/SCH29/PARA7 (3) introduced rules to prevent loss importation by
- an existing group member becoming resident in the UK and utilising the loss latent in an asset at the time of becoming resident to cover gains on assets held elsewhere in the group, or
- an existing overseas group member introducing an asset with a latent loss into a UK permanent establishment and utilising the loss against UK gains on assets held elsewhere in the group.
There may be cases where before 21 March 2000 a company was a direct or indirect subsidiary of a non-resident company. From that date, for the purposes of Schedule 7A, such a subsidiary will be a member of a group headed by the non-resident parent. The subsidiary may not previously have been a member of any group under the group definition in force before 21 March 2000, or have been a member of a group restricted, before the changes in FA2000/SCH29/PARA1, to companies resident in the UK. There are specific rules to cover such situations, see CG47989