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HMRC internal manual

Capital Gains Manual

Schedule 7AA TCGA 1992: restrictions on capital losses: background

FA93 introduced Schedule 7A into TCGA 1992 to counter `loss buying’, see CG47520+. Loss buying involved a group with gains acquiring a company with losses so that the group could use those losses against its own gains. One response to the introduction of Schedule 7A was the use of `gain buying’. Like loss buying, gain buying involves the bringing together of gains and losses which relate to different economic entities, usually different groups.

In a typical gain buying example a company, GV, acquires a valuable asset, such as a holding of shares, at no gain/no loss from a fellow member of the gain group. That group then arranges for a gain to crystallise on the valuable asset before GV joins a loss group. The gain can be crystallised by a direct sale of the asset by GV to a third party, or by the operation of the de-grouping charge in TCGA92/S179 when GV leaves the gain group (see CG45400+), or a combination of the two. Once within the loss group, GV acquires valueless assets at no gain/no loss from members of that group. GV then crystallises losses on the valueless assets. It can do this either by submitting a negligible value claim under TCGA92/S24(2) in respect of those assets or by degrouping from the loss group so that Section 179 applies to produce a loss. Provided all this happens within the same accounting period, the effect is that the gain GV realised on the assets it acquired within the gain group is offset by the loss realised on the assets it acquired within the loss group. The gain group and the loss group structure the transaction so that they split the tax saving between them.

In certain cases involving a scheme of this type, it may be possible to argue that the arrangements put in place are not effective in producing the intended result.

Section 137 and Schedule 24 FA 1998 introduced Section 177B and TCGA92/SCH7AA into to counter gain buying. These provisions apply where a company joins a group on or after 17 March 1998. They restrict the losses which a company can set against gains it realised before joining the group.

Note: New rules relating to gain buying were enacted in FA 2006. See CG47320+ for guidance on the rules which apply for accounting periods ending on or after 5 December 2005.