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HMRC internal manual

Capital Gains Manual

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

The actual cost of the assets to which the disposal is treated as relating is the sum of

  • the relevant allowable expenditure attributable to the post-entry element of the disposal, see CG47684, and
  • the cost for time-apportionment purposes of the notionally separate asset comprising the pre-entry assets disposed of.

For disposals before 30 November 1993, the indexed cost of the notionally separate asset will include indexation.

EXAMPLE

In 1996, company LV acquires 3,000 shares cost £20M.

In 2001:

  • LV leaves the L group and joins the M group, or
  • LV, already a member of the M group, becomes UK resident, or
  • LV, already a non-UK resident member of the M group, introduces the shares to its UK branch.

(Any of these three occurrences is the relevant time for the purposes of Schedule 7A, see CG47567, so in all cases the shares held by LV at this time would be pre-entry assets, and the computation below would be the same.)

In 2002, LV acquires 4,000 shares for £1M.

LV now has 7,000 shares with a cost £21M and a market value £1.75M.

In 2003, LV disposes of 5,000 shares for £0.6M.

The indexed cost of the pool before the 2003 disposal is £29.68M.

The allowable loss on the disposal is £20.6M.

                                                                                                                                       £M

proceeds                                                                                                                         0.6

cost                                     £29.68M              x         £5,000                  =             21.2

                                                                                          £7,000

allowable loss                                                                                                             (20.6)

The rules in paragraph 3 Schedule 7A treat the disposal of 5,000 shares as a disposal of all 4,000 post-entry shares in the pool, together with 1,000 of the 3,000 pre-entry shares acquired in 1996.

The pre-entry proportion of the allowable loss, before applying paragraph 4 Schedule 7A, is £6.74M. The method of computation, in paragraph 3 Schedule 7A, is to treat the 1,000 pre-entry shares disposed of as a separate asset which has never been pooled.

          £M
           
proceeds 0.6M x 1,000   0.12
      5,000    
cost of 3,000 shares 1996       20.00M  
indexation 1996-2003 say       8.66M  
           
indexed cost of 3,000 shares       28.66M  
           
indexed cost apportioned to 1,000 pre-entry shares disposed of          
           
  28.66M x 1,000 = 9.55
      3,000    
loss before time-apportionment         (9.43)
           
time-apportioned pre-entry loss          
  9.43M x 9.55 x 5 = (6.74)
  9.55   7    

The supplementary rules in paragraph 4(3)(b) Schedule 7A increase the pre-entry loss £6.74M by the excess of the expenditure actually allowed over the actual cost of the assets to which the disposal is treated as relating.

The expenditure actually allowed in the computation of the allowable loss is £21.2M.

The actual cost of the assets to which the disposal is treated as relating is £10.57M, computed as follows.

    £M
     
cost of 3,000 pre-entry shares   20.00
     
Indexation 1996-2003 say   8.66
    28.66
indexed cost apportioned to 1,000 pre-entry shares disposed of    
28.66 x 1,000 = 9.55
3,000    
cost of 4,000 post-entry shares 1.00M  
indexation 2002-2003 say 0.02M 1.02
     
total actual cost   10.57

The summary position is

  £M
   
Expenditure actually allowed 21.20
Actual cost 10.57
Addition to pre-entry loss under para 4 Sch 7A 10.63
Pre-entry loss under para 3 Sch 7A 6.74
   
total pre-entry loss (17.37)

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.