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HMRC internal manual

Capital Gains Manual

Restrictions: anti-flooding rule: alternative pre-entry loss

On its own an election to have the assets identified in this alternative way will not reduce the amount of the pre-entry loss. However, under paragraph 4(8) Schedule 7A an election for the alternative pre-entry loss under paragraph 4(6) Schedule 7A may require the alternative pre-entry loss to be computed by reference to the market value of the assets included in the disposal at the relevant time (CG47567). In that case the market value rules in paragraph 5 Schedule 7A apply.

EXAMPLE

All the transactions and events in this example take place on 1 January in the year concerned.

The terms of this example generally follow the example at CG47691. The market value of the shares on entry into the M group is £12M.

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, following a collapse in the value of the shares, 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 1993 disposal is £29.68M.

The following amounts are computed in the same way as in the example at CG47691.

allowable loss on disposal £20.60M

pre-entry loss under paras 3 and 4 Sch 7A £17.37M

The company makes an election under paragraph 4(6) Schedule 7A incorporating an election for market value treatment under paragraph 5 Schedule 7A, as applied by paragraph 4(8) Schedule 7A.

The effect of paragraph 4(7) Schedule 7A is that the 5,000 shares disposed of in 2003 are identified with the 3,000 shares acquired in 1996, and with 2,000 out of the 4,000 shares acquired in 2002. The pre-entry loss on the 3,000 shares brought into the group is computed by reference to their market value £12M at the time of entry.

  £M  
     
market value of 3,000 shares 2001 12.00  
     
cost 1996 £20.00M  
indexation 1996-2003 say £7.06M 27.06
     
Pre-entry loss (15.06)  

So the effect of the election is to reduce the pre-entry loss from £17.37M to £15.06M.

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.