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HMRC internal manual

Capital Gains Manual

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Restrictions: pre-entry loss: alternative MV calculation: pooled assets

The notional disposal is a disposal of the assets which immediately before the relevant time

  • formed part of a pool which consisted of or included assets falling to be treated for time-apportionment purposes as pre-entry assets disposed of on the real disposal
  • were comprised in a pooled asset held immediately after that time by a member of the relevant group.

EXAMPLE 1

Company LV joins the M group (the relevant group) on 1 January 1994 holding all 100 issued shares in company A. In 1997 LV sells 30 shares in A and realises a loss with a pre-entry proportion. LV elects to compute the pre-entry loss by reference to market value at the relevant time.

You first compute what the loss would have been on a notional disposal of 100 shares in A at their market value on 1 January 1994. You then take the proportion of this loss corresponding to the proportion of the 100 shares in the notional disposal represented by the 30 shares in the real disposal.

EXAMPLE 2

On 1 January 1993, company LV joins the M group (the relevant group) holding 10 of the 100 issued shares in company B, which LV acquired in 1987.

On 1 January 1995, company LW joins the M group holding 60 shares in company B, which LW acquired in 1988.

In 1996, LW transfers its 60 shares in B to LV at no gain/no loss.

In 1997, LV sells 30 shares in B and realises a loss with a pre-entry proportion.

The time-apportionment rules in paragraph 3 Schedule 7A identify the 30 shares disposed of in 1997 with the 10 shares acquired by LV in 1987 and with 20 of the 60 shares acquired by LW in 1988. This is because the shares acquired by LV have an earlier pre-entry date (paragraph 3(7)(a) Schedule 7A).

If LV makes an election for the pre-entry loss to be computed by reference to the market value of the shares at the relevant time, you first compute the loss on a market value disposal of the 10 shares brought into the group by LV on 1 January 1993. You then need to compute the market value pre-entry loss on the other 20 shares disposed of, which were brought into the M group by LW on 1 January 1995. For this you compute the loss on a notional market value disposal by LW of 60 shares on 1 January 1995, and you take 20/60 of the loss as representing the loss on 20 shares. You then add the loss on these 20 shares to the loss on the market value disposal of the 10 shares. The resulting total is the pre-entry loss on the disposal of the 30 shares disposed of by LV on the real 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.