CG47800 - 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.
The same kind of issue arises where an asset not held before the relevant time (see CG47567) is treated as the same as an asset which was held before the relevant time. Examples are freeholds merged with leasehold interests, paragraph 1(8) Schedule 7A, and post-reorganisation new holdings treated as the same asset as the original shares, TCGA92/S127.
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.
The provisions dealing with these special cases are in paragraph 7(5) Schedule 7A. Where a gain accrues on the disposal of the whole or any part of
- an asset treated as a single asset (that is, a pooled asset) but comprising assets only some of which were held at the relevant time (see CG47567), or
- an asset treated as held at the relevant time by a provision which treats an asset not held at the relevant time as the same as an asset which was held at the relevant time
there is the following loss set-off restriction. A pre-entry loss can be deducted from the gain under paragraph 7(1)(b) or (2)(b) Schedule 7A only to the extent of the proportion of the gain attributable to assets held at the relevant time , or which represents the gain that would have accrued on the asset held at the relevant time.
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.
The legislation does not prescribe any apportionment method. You can accept any reasonable method of apportionment consistent with the result that pre-entry losses are only set off against gains attributable to the increase in value up to the time of the disposal of that part of the gain asset held at the relevant time see CG47567.
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.