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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Restrictions: pre-entry loss: time-apportionment

TCGA92/SCH7A/PARA2 (8B)

Paragraph 2(8B) Schedule 7A adjusts the time- apportionment formula for assets which cannot be traced back through an unbroken sequence of no gain/no loss disposals to 31 March 1982. Under TCGA92/S56 (3), amounts which have been incorporated in cost under TCGA92/S56 (2) on no gain/no loss transfers on or after 30 November 1993 are prevented from creating or increasing a loss. This is done by restricting the relevant allowable expenditure on the disposal, see CG17740+. Paragraph 2(8B) Schedule 7A refers to this restriction as the `global reduction’. Where there is a global reduction of the relevant allowable expenditure, the individual amounts of relevant allowable expenditure, B, are treated for the purposes of the time-apportionment formula as reduced by the amount of the global reduction attributable to each amount.

EXAMPLE

This is similar to the previous example, but the asset was acquired after 31 March 1982. All events take place on 1 January in the year referred to.

In 1983, a company acquires an asset for £10M.

In 1989, the company incurs expenditure £6M on the same asset.

In 1990, the asset is transferred at no gain/no loss to A’s subsidiary, B. (The cost to B is £20.932M, see below.)

In 1991, A and B join the relevant group.

In 1992, B incurs expenditure £1M on the same asset.

In 1995, B transfers the asset at no gain/no loss to X. (The cost to X is £26.4M, see below).

In 1998, X disposes of the asset for £4M.

Indexation is incorporated in the transferee’s acquisition cost on the no gain/no loss transfers in January 1990 and January 1995 under TCGA92/S56 (2).

The breakdown of the individual amounts of expenditure at the time of the acquisition of the asset by B are:

  £M
   
in respect of the 1983 expenditure £10M 14.470
in respect of the 1989 expenditure £6M 6.462
total 20.932
B then incurs expenditure of £1M on the asset.  

Indexation on each of these items of expenditure to the time of the asset’s acquisition by X is (say):

  £M
   
in respect of the 1983 expenditure £10M 3.033
in respect of the 1989 expenditure £6M 1.355
in respect of the 1992 expenditure £1M 0.080
total 4.468

Adding this indexation to B’s cost gives an acquisition cost to X of 21.932M + 4.468M = 26.400M on the no gain/no loss transfer. The breakdown of individual amounts of expenditure to X is:

  £M
   
in respect of the 1983 expenditure £10M 17.503
in respect of the 1989 expenditure £6M 7.817
in respect of the 1992 expenditure £1M 1.080
total 26.400

On the disposal in January 1998, X’s relevant allowable expenditure would - before the operation of TCGA92/S56 (3) - produce a loss as follows:

  £M
   
Disposal proceeds 4.000
Cost 26.400
Allowable loss (22.400)

Under the general rule limiting indexation, see CG17700+, no further indexation would be available to increase the loss. In addition, however, there is a deduction to be made from the allowable expenditure, in respect of indexation incorporated into X’s relevant allowable expenditure on the no gain/no loss transfer in January 1995, see CG17740+. This amount is the £4.468M incorporated in X’s acquisition cost, as above. So the allowable loss to X on the disposal of the asset is £22.400M - £4.468M = £17.932M.

This £4.468M is the amount of the global reduction, for the purposes of the time-apportionment formula. The total of relevant allowable expenditure, C, in the time-apportionment formula is reduced by the amount of the global reduction, and the individual amounts, B, are reduced by the parts of the global reduction attributable to each amount. So the time-apportionment formula gives:

17.932 x 17.503 - 3.033 x 8.75 = 6.573

                26.4         4.468  15.75

17.932 x  7.817 - 1.355 x 2        = 1.174

                26.4       4.468    9

17.932 x 1.080 - 0.080 x 0         = nil 

                26.4      4.468    6                

                                                            7.747

 

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.