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HMRC internal manual

Capital Gains Manual

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Restrictions on setting off capital losses: FA2000 changes to group definition: transitional provisions

FA2000/SCH29/PARA1 removed the requirement for group members to be resident in the United Kingdom. FA2000/SCH29/PARA7 amended the rules for restrictions on loss buying to adapt them to the change in the group definition. This paragraph explains the consequences for the operation of Schedule 7A in relation to the transition from a UK group to a worldwide group as a result of these changes. This will only be relevant if the UK principal company of a UK group under the rules before the FA2000 changes is itself a subsidiary of an company which is not resident in the UK.

For example an overseas company H owns directly 4 UK resident subsidiaries, A, B, C, and D. A owns two UK resident subsidiaries, E and F, B owns two UK resident subsidiaries, G and H. C and D have no subsidiaries.

Prior to the changes in group definition introduced by FA2000/SCH29/PARA1, only companies that were resident in the UK could be members of a CG group. So before the changes there were two UK CG groups, one (“the A group”) consisting of A, E and F, and the other (“the B group”) consisting of B, G and H. These groups were completely separate from one another, despite their common overseas parent H. C and D were not members of any CG group.

Following the changes in group definition, there is a single group (“the H group”), consisting of H and all its subsidiaries. So A, E and F are now members of the H group instead of the old A group, B, G and H are also now members of the H group instead of the old B group, and C and D are now members of the H group when previously they were not in a group at all. FA2000/SCH29/PARAS 7 (9) and 46(2) provide the rules for determining what losses (if any) are pre-entry under TCGA92/SCH7A by reference to the H group.

FA2000/SCH29/PARA7 (9) provides that where a company was not a member of any group immediately before the changes to the group definition, but is a member of a group immediately after the changes Schedule 7A will not have effect as regards any capital losses of that company.

So in the example above, any capital losses in C or D immediately before the legislative changes which result in those companies being members of the H group are not pre-entry losses within the H group. And if C or D had assets immediately before the changes to group definition became effective, any losses accruing on a subsequent disposal of those assets are not pre-entry to the H group. So losses of C or D would be freely available for use within the H group by transfers under TCGA92/S171 or S171A to bring gains and losses together in the same company.

For companies which were members of a group under the old group definition immediately before 21 March 2000, when the changes in group definition took effect for the purposes of Schedule 7A, the rules are in FA2000/SCH29/PARA46 (2). This provides that where two or more companies were members of a group under the old definition immediately before the changes, and are members of a new group immediately after the changes, the two groups are treated as the same group.

In the example above, A, E and F were members of the old A group immediately before the changes, and are members of the H group immediately after the changes. These are treated as the same group. No losses, realised or latent, in A, E or F are pre-entry losses in the H group, unless they were already pre-entry losses in the A group. If they were pre-entry losses in the A group, they remain so for the H group. If A had acquired E in 1998, and E had losses whose use was restricted within the A group, they remain restricted within the H group after the changes. But any losses in A or F which were not restricted within the A group will not be restricted within the H group after the changes.

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.