Capital loss streaming from 19 July 2011: change in the nature of a trade or business
The rule in TCGA92/SCH7A/PARA7(1)(c) allows restricted losses to be deducted from gains accruing on the disposal of assets acquired from persons outside the relevant group and used for the purposes of a trade or business carried on by that company at the time it became a member of the group.
The provisions of TCGA92/SCH7A/PARA8 prevent the use of restricted losses where there is a major change in the nature or conduct of the trade or business or where the company has a near-dormant trade or business that is later revived.
Restricted losses may not be set against gains under TCGA92/SCH7A/PARA7(1)(c) if either of the following circumstances arises:
- Within a three year period before or after the company with restricted losses becomes a member of the group there is a major change in the nature or conduct of the trade or business that was carried on by the company when it joined the group.
- If when the company with restricted losses joined the group the scale of its trading or business activity had become small or negligible, and there followed a considerable revival.
Where either of these conditions applies, the trade or business is disregarded for the purposes of TCGA92/SCH7A/PARA7(1)(c) in relation to any time before the company joined the group.
TCGA92/SCH7A/PARA8(2) explains that a major change in the nature or conduct of a trade or business includes
- a major change in the type of property dealt in, or the services or facilities provided, or
- a major change in customers, markets or outlets, or
- in the case of an investment business, a major change in the nature of the investments held.
A major change may result from a gradual process beginning outside the three year period. An investment business has the meaning given in CTA09/S1218B (previously CTA09/S1218), see CTM08040.
The conditions in TCGA92/SCH7A/PARA8 substantially reproduce those in CTA10/S673 concerning the use of trading losses on a change of ownership of a company. You should follow the instructions at CTM06310 onwards when considering whether there has been a major change in the nature or conduct of the trade, or whether there has been a considerable revival in a near-dormant trade.
As explained in CTM06380, a Statement of Practice, SP10/91, explains the basis on which HMRC interprets ‘a major change in the nature or conduct of a trade’ (or, as appropriate, ‘business’) for various purposes, including TCGA92/SCH7A. Paragraph 9 of that statement considers where a trade or business is transferred from one company to another. For the deduction of capital losses before 19 July 2011 such a transfer would automatically prevent the future use of restricted losses under TCGA92/SCH7A/PARA7(1)(c). The approach in paragraph 9 of SP10/91 will apply where a loss falls to be deducted on or after that date.
Note: Additional rules relating to loss buying were enacted in FA 2006. See CG47020+ for guidance on the rules which apply in priority to TCGA92/SCH7A for accounting periods ending on or after 5 December 2005.