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HMRC internal manual

Capital Gains Manual

Mineral leases: terminal loss relief: introduction

Mineral lease - Terminal loss relief

TCGA92/S202

When the underlying minerals have been extracted from land, the value of that land can be considerably diminished. If certain conditions are satisfied, then where either a mineral lease ends or the land is disposed of prior to its expiry, a `terminal loss relief’ can be claimed.

This relief has been withdrawn by FA 2012/Sch 39/Para 46 for any mineral leases or agreements commencing on or after 1 April 2013 (for businesses subject to Corporation Tax) and 6 April 2013 (for businesses subject to Income Tax). Terminal loss relief will continue to apply to mineral leases and agreements entered into before those dates but which end (or are disposed of) after those dates.

 

Definitions

TCGA92/S202 and ITTOIA05/S341-3 and CTA09/S274-6

The terms ‘minerals’, ‘mineral royalties’ and ‘mineral lease or agreement’ are defined in full in ITTOIA05/S341-3 (for individuals) and CTA09/S274-6 (for companies). Brief descriptions of these terms are:-

  • ‘minerals’ means all substances in or under the land which are normally extracted by underground or surface working, but excluding water, peat, top-soil and vegetation.
     
  • ‘mineral royalties’ means royalties receivable on or after 6 April 1970 under a mineral lease or other agreement relating to the winning and working of minerals.
     
  • ‘mineral lease or agreement’ means any lease or similar agreement granting the right to win and work minerals in the United Kingdom.

For the purposes of these definitions, ‘winning’ means getting access to the minerals and ‘working’ means getting them out of the ground.

‘Relevant event’ means either the expiry or termination of the mineral lease or agreement or the disposal (deemed or actual) of the land subject to the mineral lease or agreement, TCGA92/S202 (2).

‘Terminal loss’ means a loss arising as the result of a claim under TCGA92/S202 (3) or (7).

 

Persons eligible to claim

TCGA92/S202 (1)

A person is eligible to claim terminal loss relief under TCGA92/S202 if, at the time of the relevant event, he or she

  • is entitled to receive mineral royalties under the lease or agreement in question, and

 

  • has an interest in the land to which the lease or agreement relates.

TCGA92/S203 (2)

No special form for a claim under TCGA92/S202 (3) or (7) is prescribed or provided.

TCGA92/S203 (2) provides that a claim under Section 202 must be made within four years from the date of the relevant event.

 

Expiry or termination of lease

TCGA92/S202 (3)

When a mineral lease either expires or is terminated early, an eligible person can make a claim to terminal loss relief under TCGA92/S202 (3). The effect of such a claim is to treat the land which was subject to the lease as having been disposed of and immediately reacquired at its market value on the date that the lease came to an end.

However, such a claim can only be made if an allowable loss arises on the deemed disposal and reacquisition.

 

Effect of Claim

If a valid claim under TCGA92/S202 (3) is made, the person making that claim can elect for the terminal loss to be utilised in one of two ways.

TCGA92/S202 (6)

The loss can be treated as an allowable loss arising in the year of assessment or accounting period in which the relevant event occurred. That loss can then be set off or carried forward in the same way as any other allowable loss.

TCGA92/S202 (9) - (11)

Alternatively the terminal loss can be carried back against the chargeable gains arising from the receipt of mineral royalties under TCGA92/S201 that is the lease whose ending gave rise to the opportunity for the claim under TCGA92/S202 (2).

As set out in CG71700, s201 was repealed for mineral royalties incurred on or after April 2013.  It previously charged amounts received as partly capital gains and partly revenue income.

It is important to note that the terminal loss cannot be carried back and offset against any other gains, that is gains other than those arising from the royalties received under the mineral lease in question.

If the taxpayer elects to carry back the terminal loss, it is set off first against the relevant chargeable gains arising in the year of assessment or accounting period immediately preceding that in which the relevant event occurred. Any remaining balance of terminal loss is then set against the relevant gains arising in the next preceding year of assessment or accounting period, and so on. However, no part of the terminal loss can be carried back to any year of assessment or accounting period which ended more than 15 years before the relevant event occurred.

Any balance which remains after all the relevant gains arising in the 15 years in question have been relieved, is treated as an allowable loss arising in the year of assessment or accounting period in which the relevant event occurred. This balance is then available for set off or carry forward in the normal way.

 

Disposal of land

TCGA92/S202 (7)

If there is an actual disposal of the land prior to the expiry of the mineral lease, or a deemed disposal otherwise than as a result of a claim under TCGA92/S202 (3), and an allowable loss arises, that loss can be utilised in the normal way. However, the person making the disposal, providing they are eligible to make a claim, can elect to treat this loss as a ‘terminal loss’ for the purposes of TCGA92/S202 and can carry back the loss in accordance with TCGA92/S202 (9)-(11).

 

Example

On 1 April 1992, a company granted a 25- year mineral lease over a piece of land which it owned. Under that lease, it received mineral royalties of £20,000 per year.

By virtue of TCGA92/S201 (1), it was treated as making a chargeable gain of £10,000 in each of the 21 years in question until 31 March 2013 when TCGA92/S201 was repealed.

The company’s accounting period ran to 31 March in each year. During the 25-year period in question, the only other chargeable gains made by the company were gains of £30,000 in the accounting period ended 31 March 2012 and gain of £20,000 in the accounting period ended 31 March 2016.

The mineral lease expired on 31 March 2017 and the company immediately claimed relief under TCGA92/S202 (3). After agreeing valuations a terminal loss of £50,000 arose. The company elected to have this loss carried back under TCGA92/S202 (9)-(11).

The loss would be utilised by relieving the gains arising in each of the five accounting periods ending on 31 March 2013, 2012, 2011, 2010 and 2009. This would exhaust the terminal loss and no further relief would be available.

It should be noted that no part of the terminal loss can be used to offset the ‘other’ gains arising in the accounting periods ended 31 March 2012 or 2016.