Restrictions on use of capital losses: overview
TCGA92/Sch 7A and TCGA92/Sch 7AA are provisions that restrict the set-off of losses against chargeable gains where a company becomes a member of a group. They apply respectively to situations where a company joins a group with accrued losses (or assets standing at a loss) or gains. They were responses to tax driven arrangements known as loss buying and gain buying but are “mechanical” provisions that can apply to entirely commercial arrangements.
From 5 December 2005 a targeted anti-avoidance rule in TCGA92/S184A to TCGA92/S184F (known as “TAAR2”) applies to restrict the use of losses in cases involving arrangements with a main purpose of obtaining a tax advantage. The mechanical rule in TCGA92/Sch 7AA that applied to a company with accrued gains joining a group with losses was repealed at that time.
The mechanical rule in TCGA92/Sch 7A that applies to restrict the use of losses by a company that joins a group was extensively amended as part of the Capital Gains Groups simplification measures in Finance Act 2011. In particular, the detailed rules designed to counter certain avoidance situations were removed and restrictions now apply only to stream losses that had accrued before a company joins a group. In short, such losses can only be set against gains on assets that are used for the continuing business of the company that joins a group. As such they continue to place limits on the tax benefits that a group can obtain from purchasing another company or group that has accrued capital losses.
The term “loss streaming” is used to distinguish the rules following amendment by Finance Act 2011.
Finance Act 1993: TCGA92/Sch 7A applies to restrict the use of losses of a company joining a group, whether or not those losses have accrued at the time of joining.
Finance Act 1998: TCGA92/Sch 7AA applies to restrict the use of losses of a group where a company joins the group with an accrued gain. The rule applies where a company joins a group from 17 March 1998 to 4 December 2005.
Finance Act 2000: rules amended to take account of the changes to the capital gains group definition, to include non-UK resident companies.
Finance Act 2006: TCGA92/S184A to TCGA92/S184F apply to restrict the use of losses where a company joins a group as part of tax motivated arrangements. See CG47020+ for guidance.
Finance Act 2011: TCGA92/Sch 7A applies to restrict the use of losses of a company joining a group only where the losses have accrued at the time of joining. See below for when the changes to the legislation have effect.
Finance Act 2011 commencement rule
The legislation as amended by the FA11 changes applies where a company deducts losses from gains on or after 19 July 2011. That means that it applies to the use of accrued losses in company accounting periods that end on or after that date.
However, where a company had previously joined a group with an asset standing at a loss, and then a loss on the asset accrued before 19 July 2011 that remains a restricted loss for the purposes of the amended rules. Such a loss may be deducted from gains in accordance with the amended rules, FA11/SCH11 para 12.
Layout of guidance
The rules in TCGA92/Sch 7A that apply to companies deducting losses on or after 19 July 2011 are covered first. The rules that applied before that date are retained at CG47520+.
The guidance for TCGA92/Sch 7AA at CG48200+ is also retained for reference.