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HMRC internal manual

Capital Gains Manual

Capital loss streaming from 19 July 2011: outline of legislation

From 19 July 2011 TCGA92/SCH7A (the day Finance Act 2001 was passed) applies to restrict the use of capital losses that have accrued before a company joins a group. Such losses may only be set against certain gains.

The legislation is set out in a number of paragraphs that can be summarised as follows:

Paragraph 1

This says that the rule will apply whenever a company becomes a member of a group with an accrued loss (referred to as a “pre-entry loss”) unless the losses are otherwise restricted by TCGA92/S184A (TAAR2). It provides a special rule for situations where one group of companies is acquired by another, modifying the usual effect of TCGA92/S170(10) for the purposes of the schedule. See CG47420.

Paragraph 6

This provides an order of set off where there are both restricted and unrestricted losses, or losses affected by different restrictions, available to set against gains. See CG47425.

Paragraph 7

This sets out those gains from which a restricted loss may be deducted, principally gains on assets owned by the company at the time it joined the group or on assets used for the purposes of a continuing trade or business that the company carried on at that time. The paragraph makes provision for situations such as where more than one company joins a group at the same time. See CG47430-5. It also deals with situations where an asset may lose its identity as a result of “pooling” or merger and allows losses to be set against certain gains that accrue on the disposal of a Qualifying Corporate Bond. See CG47440-5.

Paragraph 8

This prevents the use of restricted losses against gains on assets used for a continuing trade or business if there is a major change in the nature or conduct of the trade or business. See CG47450.

Paragraph 10

This applies the schedule where a loss has arisen on the appropriation of an asset to trading stock and an election has been made under TCGA92/S161(3). See CG47455.

Paragraph 11

This stops losses being restricted where a company joins a group as a result of certain statutory transfers within the public sector. See CG47460.

Paragraph 12

This stops losses being restricted where a company joins another group as a result of a disposal of shares to which a no gain/no loss disposal rule applies. See CG47465.