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HMRC internal manual

Capital Gains Manual

Gains on assets held on entry into a group: pooled or merged assets

TCGA92/SCH7A/PARA7 (5)

The general rule in paragraph 7(1)(b) and (2)(b) Schedule 7A is that a loss can be set off against a gain on an asset brought into the group at the same time as the loss or the loss asset. But in the case of a pooled asset, for example, it is necessary to deal with the case where there is an addition to a pooled asset after entry into the group, and there is a latent gain in the assets added to the pool.

EXAMPLE

All companies are resident in the UK.

In 1994, company LV leaves the L group and joins the M group holding asset X (cost £12M, market value nil) and 1,000 shares in Y plc.

Company MW in the M group holds one million shares in Y plc showing a substantial unrealised gain.

In 1995, MW transfers its shares in Y plc to LV at no gain/no loss under TCGA92/S171. LW sells all its shares in Y plc and realises a chargeable gain £20M. LV makes a negligible value claim in respect of asset X and crystallises an allowable loss £12M.

In the hands of LV, the shares in Y plc held at the time of entry into the M group are a pooled asset within TCGA92/S104. The one million shares acquired by LV from MW in 1995 represent an addition to that asset.

So LV’s gain on disposal of all its shares in Y plc in 1995 is a gain on the disposal of an asset (the pool of shares in Y plc) which was held at the time of entry into the M group. This means that, in the absence of special rules, LV’s loss £12M could be set off against LV’s gain £20M. This is because the case satisfies the terms of paragraph 7(2)(b) Schedule 7A, even though the loss is attributable to the reduction in value of asset X within the L group, and the gain is substantially attributable to the increase in value of one million shares in Y plc while held by the M group.

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.