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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: chargeable gains on derivatives: carry back of losses: examples

Examples of carrying back a loss

Example 1

A company enters into three property derivative contracts in its 12-month accounting period ended 31 December 2005, and continues to hold them in the year ended 31 December 2006. CTA09/S641 gains and losses on these contracts are as follows (losses in brackets):

  Y/e 31 December 2005 Y/e 31 December 2006
1 £700,000 (£150,000)
2 (£100,000) (£800,000)
3 £1,400,000 £200,000

In addition, the company has an allowable loss of £1,500,000 in 2005 from a disposal of land, and in 2006 it has a non-derivative chargeable gain of £600,000. At 1 January 2005, it has no capital losses brought forward.

In the year ended 31 December 2006, it has aggregate losses from its derivative contracts of £950,000, and a gain from derivative contracts of £200,000. It therefore has net S641 losses of £750,000.

In the year ended 31 December 2005, it has total derivative contract gains of £2,100,000 (amount G) and derivative contract losses of £100,000 (amount L). In addition, it has non derivative contract losses (amount N) of £1,500,000. Its net S641 gains for the period (G - (L+N)) are therefore £500,000.

For the year ended 31 December 2005, the company will initially pay tax on chargeable gains of £500,000. Having sustained derivative contract losses in 2006, the company might claim to carry back £500,000 of that loss to 2005. If it makes such a claim, its 2005 self-assessment will be amended to reduce the chargeable gain to nil. For 2006, its derivative contract losses will be reduced to £250,000; this amount is deducted from the £600,000 gain in the year, so that the company will have total gains of £350,000.

The company is not obliged to claim in respect of £500,000. It might, for example, claim to carry back only £150,000 of the loss, setting the remaining £600,000 against the chargeable gain in 2006. Or it may make no claim at all, in which case £600,000 of the loss will be used in 2006 and the remaining £150,000 carried forward.

Example 2

The facts are as in example 1, except that at 1 January 2005 the company has capital losses of £1,000,000 brought forward. Its total non S641 losses for 2005 are therefore £2,500,000 - the £1,500,000 loss on the property disposal in the year, plus the £1,000,000 losses brought forward. This amount, added to the £100,000 derivative contract losses, exceed the derivative contract gains for the year. The company therefore has no capacity to carry back losses from 2006.

Example 3

The facts are as in example 2, except that in the year ended 31 December 2005, another company (X Ltd) in the same group as the taxpayer company disposes of a property to an external party. In the year ended 31 December 2006, X Ltd and the taxpayer company jointly elect under TCGA92/S171A (as it applied at that time) that the disposal is treated as having been made by the taxpayer company. In consequence, a chargeable gain of £2,300,000 accrues to the company for 2005.

The total losses to set against gains in 2005 (£2,500,000) are first of all set against the non S641 gain of £2,300,000. A residue of losses (amount N) of £200,000 remains. The total of amount N and amount L (the paragraph 45A losses for the year - £100,000) is deducted from the £2,100,000 derivative contract gains.

We therefore have:

Net S641 gains = £2,100,000 - (£100,000 + £200,000) = £1,800,000

The company can therefore claim to carry back the full amount (£750,000) of net S641 losses accruing in 2006.