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Capital Gains Manual

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HM Revenue & Customs
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Restrictions: pre-entry loss: anti-flooding rule for pooled assets

TCGA92/SCH7A/PARA4 (2)

If all the assets disposed of are post-entry assets, the method of computing the pre-entry loss is in paragraph 4(2) Schedule 7A. The actual loss on the disposal is treated as a loss on the disposal of a pre-entry asset. The pre-entry proportion of the loss is the amount (not exceeding the actual loss) by which the relevant allowable expenditure actually allowed as a deduction exceeds the relevant allowable expenditure attributable to the post-entry element of the disposal.

EXAMPLE 1: DISPOSAL BEFORE 30 NOVEMBER 1993

In 1984, company LV acquires 500 shares cost £10M.

In 1988, LV leaves the L group and joins the M group.

In 1990, LV acquires 3,500 shares for £2.0M.

LV now has 4,000 shares with a cost £12.0M and a market value of about £2.29M.

In 1992, LV disposes of 2,000 shares for £1.0M.

The loss on the disposal is £7.95M computed as follows.

        £M
         
proceeds       1.0
indexed pool before 1992 disposal say 17.9M        
         
allowed on part disposal        
         
17.9M x 2,000 = 8.95
    4,000    
         
allowable loss       (7.95)

The expenditure actually allowed is £8.95M. The inclusion of indexation in the expenditure actually allowed results from paragraph 4(1)(d) and (12) Schedule 7A, see CG47682.

The relevant allowable expenditure attributable to the post-entry element of the disposal is £1.30M, computed as follows

    £M
     
cost of 3,500 shares 1990   2.00
     
indexation 1990-1992, say   0.27
    2.27
pro rata apportionment to 2,000 shares disposed of    
2.27M x 2,000 = 1.30
3,500    

The pre-entry proportion of the loss is £7.65M computed as follows.

    £M
     
expenditure actually allowed   8.95
     
less relevant allowable expenditure  

attributable to post-entry element

of the disposal 1.30    
       
  difference   7.65

EXAMPLE 2: disposal on or after 30 November 1993

In 1986, company LV acquires 1,000 shares cost £10M.

In 1993, LV leaves the L group and joins the M group.

In 1994, LV acquires 4,000 shares for £0.4M.

LV now has 5,000 shares with a cost £10.4M and a market value £0.5M.

In 1999, LV disposes of 2,000 shares for £0.3M.

The loss on the disposal is £3.86M computed as follows.

        £M
         
proceeds       0.30
         
cost apportioned to 2,000 shares disposed of        
         
10.4M x 2,000 = 4.16
    5,000    
allowable loss (3.86)      

The expenditure actually allowed is £4.16M.

The relevant allowable expenditure attributable to the post-entry element of the disposal is £0.20M, computed as follows

        £M
         
cost of 4,000 shares 1994 0.40      
         
cost apportioned to 2,000 shares disposed of        
         
0.5M x 2,000 = 0.20
    4,000    

The pre-entry proportion of the loss is the actual loss £3.86M computed as follows.

£M  
   
expenditure actually allowed 4.16
relevant allowable expenditure attributable  
to post-entry element of the disposal 0.20
difference -—-
  3.96
  -—-
pre-entry proportion restricted to actual loss 3.86
  -—-

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.