MTT21270 - Calculating the effective tax rate: Adjusted profits: Election to spread certain capital gains over five years

A group may elect for the net gain on the disposal of certain assets to be spread across a period of five years. Where the election has been made, a gain to which the election applies ('the gain') will be spread over the period for which the election is made and in which the gain has been realised (the ‘election period’), and the four preceding periods (the ‘look-back period’).

The gain is to be spread to the earliest year first, insofar as members in the territory have losses against which the gain can be set. Any remainder is spread evenly between the five years and allocated to members in proportion to their respective amount of relevant gains.

The election is made in respect of a territory and will apply to all disposals of local tangible assets by members in that territory, in the period for which the election applies.

This election is an annual election. See MTT52200 for guidance on making elections.

This election is set out in section 163 of Finance (No.2) Act 2023.

Gains and losses affected

A gain will be subject to the election if it arises from the disposal of a local tangible asset, which is realised in a period for which the election is made, and it does not arise from the transfer of assets between members of the same group.

Local tangible asset

An asset is a ‘local tangible asset’ if it is immovable property located in the same territory as the member disposing of it.

Method for spreading the gain

The gain is to be spread by the following process, as set out in section 163(2) F(no.2)A 2023.

Step 1 – Determine whether any member of the group in the territory in the first accounting period of the look-back period (the ‘carry-back period)’ has net losses in its underlying profits accounts for that period that arose from the disposal of local tangible assets (a ‘relevant net loss’) . Ignore any losses which have already had a gain set against them as a result of this election.

Note that it is not necessary for the members identified here to be members of the group or located in the territory in the election period.

Step 2 – Where there are members with losses identified under step 1, allocate the gain between those members. To determine the proportion of the gain to be allocated to each member, divide:

  • the relevant net loss of that member,

by

  • the total relevant net loss of all members in the territory.

Step 3 - Adjust the underlying profits of each member by reducing its losses (but not below nil) by the amount of the gain allocated to it under Step 2.

Steps 4 to 6 – If there is still an amount of the gain that has not been allocated, repeat steps 1 to 3 for the second period of the look-back period, and then the third and fourth periods in turn.

Step 7 – if there is still an amount of the gain that has not been allocated, , repeat steps 1 to 3 as if the reference to the first accounting period was a reference to the election period.

Step 8 - If there is still an amount of the net gain which was not used to reduce the members’ losses, divide the amount remaining by 5.

Step 9 – Determine which standard members of the group located in the territory in the election period have net gains from the disposal of local tangible assets in the election period. These are “current gain members”.

Step 10 – For each period in the look-back period and the election period, adjust the underlying profits for that period (“the adjustment period”) of each current gain member by allocating the amount determined under Step 8 between the current gain members for that period in proportion to:

  • the net gains made by the current gain member from the disposal of local tangible assets in the election period,

divided by

  • the net gains made by all current gain members for that period from the disposal of local tangible assets in the adjustment period.

Step 11 – If there are no current gain members for an accounting period in the look-back period, the amount determined under Step 8 is to be allocated equally between all standard members of the group located in the territory in that period.

Step 12 – If there are no standard members of the group in the territory in one of the accounting periods in the look-back period, the amount determined under Step 8 that would be allocated to that period is instead allocated to the election period, with the underlying profits of each current gain member adjusted under the same procedure as Step 10.

Effect on effective tax rate and top-up amounts

Where the underlying profits of a member are adjusted as a result of this election, the effective tax rate and top-up amounts for that member, and other members located in the same territory, must be recalculated.

Effect on covered tax balance

Any amount of tax in relation to the disposal of the local tangible assets in the election period for members affected by the election must be excluded from the member’s covered tax balance.