LAM03340 - Calculation of ‘I’ Income and chargeable gains: Deemed disposals loss offset and carry back: TCGA92/S213(3)
Allowable losses can either be spread over 7 years or carried back for two accounting periods. In this example, the net amount is a £700M loss in 2017 and a gain of £1,050M in 2018. There were no other BLAGAB chargeable gains from deemed disposals in prior years against which the 2017 loss could be carried back.
| £M | Net Amount | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|---|---|---|---|
| Loss b/fwd | 0 | (100) | (50) | 0 | 0 | 0 | 0 | 0 | |
| 2017 | (700) | (100) | (100) | (100) | (100) | (100) | (100) | (100) | |
| 2018 | 1050 | 150 | 150 | 150 | 150 | 150 | 150 | 150 | |
| Chargeable | (100) | (50) | 0 | 50 | 50 | 50 | 50 | 150 |
In total there would be £350M of chargeable gains (£1,050M less £700M). A loss of £100M is carried forward at the end of 2017, added to the spread loss of £100M in 2018 and offset against the £150M spread gain leaving £50M loss carried forward to 2019. In 2019 there would be £150M losses in total (£50M carried forward and £100M 2019 spread loss) to offset against the £150m gain in 2019. Therefore there are no net chargeable gains in 2017, 2018 and 2019. In 2020-2023 there is a net £50m gain in each year using up all the spread loss. In 2024 the full £150m gain is chargeable.
Carry-Back of Losses TCGA92/S213(3)
The deemed disposal provisions result in a charge to tax on unrealised gains. It is possible that due to a fall in market values a gain arising one year is reduced or eliminated in the following year. Over the longer period there might be no appreciation. To allow for this possibility S213(3) provides for the carry back of any net amount of S212 losses (i.e. any excess of aggregate losses over aggregate gains arising from the deemed disposal before spreading) and offset against the net amount in the two previous accounting periods.
The net amount of S212 losses can only be carried back for set-off against the net amount of S212 gains (i.e. the gain remaining after the aggregate gains on the deemed disposal are reduced by the aggregate of losses on the deemed disposal). The net amount of losses is determined before spreading.
Carried back losses are to be relieved against the net amount of gains (before spreading) of a later accounting period in preference to an earlier one. This enable the loss resulting from a S212 disposal to be offset against the previous period increase in market prices.
Claim for Carry Back
The company must make a claim for the carry back of the loss within two years of the end of the accounting period in which the loss arose. The claim is generally made by showing the carry back in the calculations supporting the tax return. The claim can be in respect of the whole or just part of the loss. Losses not carried back are spread forward over 7 years. Spread forward losses can reduce chargeable gains of the AP (including gains not arising from a deemed disposal) or (if there are no chargeable gains of the AP) carried forward in the same way as any other allowable loss.
Example
In this example the position is the same as in the example in LAM03330. In addition for APE31/12/2019 the deemed disposal under S212 gives rise to an aggregate loss and a claim is made under S213(3) by 31 December 2021 to carry back the 2019 losses.
| S212 net amount before loss carry back | |
|---|---|
| APE 31/12/17 | £700M |
| APE 31/12/18 | £1050M |
| APE 31/12/19 | £(350)M |
| APE | Net amount | Loss c/b | After c/b | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 17 | 700 | 0 | 700 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | |
| 18 | 1050 | (350) | 700 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | |
| 19 | (350) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||
| CG | 100 | 200 | 200 | 200 | 200 | 200 | 200 | 100 |
This results in total spread gains in 2017 of £100M and 2018-2023 of £200M and in 2024 £100M totalling £1400M.
The whole of the £350M loss which is the net amount in 2019 can be carried back to 2018 and offset against the whole of the net amount for 2018. This reduces the 2018 net amount of £1050M gain to a gain of £700M, The £700M is then spread over seven years at £100M per annum. The £700M gain in 2017 is unaffected by the carry back and is spread over 7 years from 2017.
In summary, the net amount, i.e. aggregate of gains and losses arising from the deemed disposals under S212 is calculated and can be reduced to zero by a loss carried back from the following period. If the net amount is insufficient to absorb the loss the excess of the loss can be carried back another year. Once carried back losses have been set off, one-seventh of any net amount remaining in the year to which the loss is carried back, is a single chargeable gain for that period. If there is a net unrelieved loss remaining in the year which the loss is incurred, one-seventh of that net amount is a single allowable loss for the period.
The remaining six-sevenths are spread equally over the next six years. For each accounting period, the amount spread is a single chargeable gain or allowable loss that accrues on the last day of that period. So, if there are year-long accounting periods, a company will have a chargeable gain (or allowable loss) accruing at the end of each year for 7 years as a result of a deemed disposal under S212.
Chargeable gains and allowable losses also accrue on the actual disposal of an asset subject to the provisions of S212. In that case, the gain or loss will be calculated by reference to the market value at the date of the last deemed disposal. Chargeable gains and allowable losses on actual disposals are not spread. Where there is an actual disposal, earlier deemed disposals continue to unwind over the normal spreading period (save for the potential clawback for Authorised Contractual Schemes see LAM03350).
Restrictions on carry back where change of ownership
Where a company joins a group in an accounting period,
- a net loss arising from a deemed disposal under S212 in a later period can still be set against gains accruing on the deemed disposal on the last day of the joining period (because those gains will by definition be post-entry gains).
- where there is a net loss arising from the deemed disposal at the end of the joining period the carry back of that loss is restricted so that only so much of the loss that accrued on assets which the company held prior to joining can be carried back to an earlier period TCGA92/S213(8H).
- a net loss arising from the deemed disposal in a later period cannot be carried back to a period earlier than the joining period TCGA92/ S213(3)(ca).
The loss buying provisions and TCGA92/S212
There is a special rule for losses arising from a deemed disposal under S212 in the capital loss buying provisions. This prevents the spreading rules creating a unique loss buying opportunity. When a company joins a group, TCGA92/SCH7A/PARA1(10) treats losses as accruing in the year of deemed disposal, not in the year to which they are spread forward i.e. for the purposes of the loss buying rules a loss arising in 2017 and spread over 2017 to 2023 is treated as a 2017 loss.