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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Restrictions: capital losses: identifying pre-entry losses: assets

A pre-entry asset is any asset held by any company, immediately before the relevant time (see CG47567), whether or not the company is the one which makes the disposal. If a company brings an asset into a group, a loss on a disposal of the asset made by any company in the group is a loss on the disposal of a pre-entry asset. It is immaterial whether the disposal is made by the company which initially brought the asset into the group, or by any other group company to which the asset was subsequently transferred.

EXAMPLE 1

In 1990, group L sells loss vehicle LV to a company in the M group. LV holds asset X. In 1992, LV sells asset X outside the M group and has an allowable loss £1M.

The relevant group is the M group. LV’s 1992 loss on asset X is a loss on the disposal of a pre-entry asset, since LV held asset X immediately before it became a member of the M group.

EXAMPLE 2

In 1991, group L sells loss vehicle LV to company MA which is a member of the M group. LV holds asset Y. In 1992, LV transfers asset Y at no gain/no loss to company MB which is a fellow subsidiary in the M group. In 1993, MB sells asset Y outside the M group and has an allowable loss £2M.

The relevant group is the M group. MB’s 1993 loss on asset Y is a loss on the disposal of a pre-entry asset. This is because asset Y was held by company LV immediately before LV became a member of the M group.

You should note, however, that due to a defect in the time-apportionment rules in paragraph 2 Schedule 7A, the use of any loss arising on a pre-entry asset was not restricted where, after the asset was brought into the group, the asset was transferred at no gain/no loss prior to the loss disposal - as in Example 2 above. This defect was corrected by FA94 in relation to cases where a loss is set against a gain, and either the loss or the gain (or both) arose on or after 11 March 1994. See CG47630+.

From 21 March 2000, a pre-entry asset can also be an asset owned by a group member who is not resident in the UK, if that asset is brought within the charge to corporation tax so that any loss on disposal would be allowable. An asset can be brought within the charge to corporation tax by:

  • the non-resident company which holds the asset becoming resident in the UK, or
  • the non-resident company beginning to use the asset for the purposes of a trade carried on in the UK through a permanent establishment, so that gains or losses on a disposal of the asset would be chargeable to corporation tax under TCGA92/S10 (3).

The date by reference to which losses on disposal of the asset are pre-entry is not the date when the non-resident company joins the group, but the date when the asset was brought within the charge to corporation tax.

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.

FA11/S46 and FA11/SCH11 greatly simplified the rules in TCGA92/SCH7A for the deduction of losses on or after 19 July 2011. See CG47400+ for guidance on loss streaming from that date.