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HMRC internal manual

Capital Gains Manual

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Restrictions: anti-flooding rule: effect of election on later disposal

TCGA92/SCH7A/PARA5 (7)

An election under paragraph 4(6) and (8) Schedule 7A may cause an amount of pre-entry loss to crystallise on a disposal of post-entry assets, in circumstances where that amount of pre-entry loss remains latent in pre-entry assets still in the pool after the disposal. This is because the notional identification for the purpose of computing the alternative pre-entry loss in paragraph 4(7) Schedule 7A does not affect the identification rules in paragraph 3 Schedule 7A in relation to subsequent disposals, paragraph 4(14) Schedule 7A.

In the example in CG47694, the calculation of the alternative pre-entry loss based on market value in 1991 is a loss by reference to all 3,000 pre-entry shares acquired in 1986. Whereas the general rules in paragraph 3 Schedule 7A identify only 1,000 of these shares with the 1993 disposal, and treat the post-1993 pool as still containing 2,000 pre-entry assets. If there is a subsequent disposal of the entire pool, and the company makes a market value election under paragraph 5 Schedule 7A, there would be a pre-entry loss on that disposal in relation to the 2,000 remaining pre-entry assets.

The rule which prevents duplication in these circumstances is paragraph 5(7) Schedule 7A. In relation to a later disposal, the proportion of the pre-entry loss which is apportioned to the assets by reference to which a pre-entry loss has already arisen, because of an earlier election under paragraph 4(6) Schedule 7A, is not to be regarded as a pre-entry loss in relation to the later disposal also. In the example in CG47694, all 3,000 pre-entry shares have been identified with the disposal in 1993. So there will be no further pre-entry loss, on the later disposal.

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.