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HMRC internal manual

Capital Gains Manual

Groups to which loss set-off restrictions apply: special cases

The effect of the capital gains group definition is that it is possible for a parent with a wholly-owned subsidiary to take the subsidiary out of the group, while retaining commercial ownership and control. This may happen where the subsidiary issues deferred shares with negligible commercial rights, but accounting for more than 25 per cent of the subsidiary’s ordinary share capital, to an unconnected third party. In this case the subsidiary is no longer a 75 per cent subsidiary of the parent within ICTA88/S838 (1)(b) for the purposes of TCGA92/S170 (3)(a). Alternatively, the subsidiary may issue a security which is held by an unconnected third party on terms such that the unconnected third party is an equity holder within ICTA88/SCH18/PARA1. This would be the result where the interest on the security is linked to a small proportion of the profits of the subsidiary, so that the loan is not a normal commercial loan because of ICTA88/SCH18/PARA1 (5)(b). In a case where the subsidiary has no actual profits in the accounting period, the £100 rule in paragraph 2(1)(b) Schedule 18 comes into play. If the interest on the security, treated as a profit distribution by paragraph 2(3) Schedule 18, would absorb the £100 notional profits, then the subsidiary is no longer an effective 51 per cent subsidiary of the principal company for the purposes of TCGA92/S170 (3)(b) and (7). The subsidiary may then itself be the principal company of another group because of TCGA92/S170 (5), see CG45195.

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.