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HMRC internal manual

Capital Gains Manual

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Restrictions: alternative market value calculation

TCGA92/SCH7A/PARA5 (2A)

Para 5(2A) Schedule 7A deals with this problem by ensuring that, in these cases, the restrictions on indexation apply both to the calculation of the pre-entry proportion of the loss on the actual disposal, and to the alternative market value calculation under para 5 Schedule 7A. The example below shows how the computation in CG47720 would change if the disposal of the asset had been in January 1994, rather than January 1993.

EXAMPLE (ACTUAL DISPOSAL ON OR AFTER 30 NOVEMBER 1993)

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

In 1998, company LV acquires an asset for £10M.

In 2001, when the market value of the asset is £7M:

  • 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 2004, LV sells the asset for £2M.

The allowable loss is £8.0M computed as follows.

                                                £M

Proceeds                               2.00

Cost                                      10.00

Allowable loss                    (8.00)

The time-apportioned loss is (8.00) x 5 = (4.00)

                                                                              10

LV makes an election for the pre-entry loss to be computed by reference to a deemed disposal in 2001 at market value £7M. The market value computation of the pre-entry loss is £3.0M.

£M  
   
proceeds 7.0
cost 10.0
   
Pre-entry loss 3.0

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.