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HMRC internal manual

Capital Gains Manual

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Restrictions: pre-entry loss: anti-flooding rule for pooled assets

TCGA92/SCH7A/PARA4

The time-apportionment rule in paragraph 2(4) Schedule 7A, see CG47664+, prevents post-entry expenditure at the time of a reorganisation effectively converting a pre-entry loss into a post-entry loss. The same problem arises outside the share reorganisation context in relation to post-entry expenditure on pooled assets generally.

EXAMPLE

This example ignores indexation.

Company LV joins the M group holding 1,000 shares in company X, cost £10M market value £0.1M. Another shareholder in company X sells to LV 4,000 shares in X at their market value £0.4M. LV now has a holding of 5,000 shares with a cost £10.4M and a market value £0.5M. If LV sells 4,000 shares for £0.4M, the loss on disposal is £7.9M, computed as follows.

          £M
           
proceeds         0.4
cost 4,000 x 10.4M = 8.3
  5,000        
allowable loss before indexation         (7.9)

In the absence of special rules this loss would not be liable to restriction under Schedule 7A because it would be treated as a disposal of the post-entry element of the holding. See CG47645, example 1.

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.