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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Losses: loss buying rules (CT)

Background

There are existing anti-avoidance rules at ICTA88/S768 and ICTA88/S768B which counteract the purchase of a company for its accumulated trading losses or excess management expenses and, with effect from 10 February 2005, non-trading loan relationship deficits. Those rules apply where more than half of a company’s shares change hands within a specified period and either before that time the trade or business had become small or negligible (without any considerable revival) or there is (again, within a specified period) a major change in the nature or conduct of the trade or business or (only in the case of an investment company or, from 1 April 2004, a company with investment business) there is a significant increase in the company’s capital. They act to prevent any trading losses or excess management expenses and, with effect from 10 February 2005, non-trading loan relationship deficits arising before the change of ownership from being set off against profits arising after that change.

There is an additional existing rule at ICTA88/S768C only for investment companies or, from 1 April 2004, a company with investment business, which prevents excess management expenses and, with effect from 10 February 2005, non-trading loan relationship deficits arising before a change of ownership from being set off against chargeable gains arising in the three years after that change on assets transferred to the company under the intra-group no gain/no loss provisions of TCGA92/S171 (regardless of whether there has been a major change in the business, etc). See CTM06300 onwards for detailed guidance on the application of ICTA88/S768 and CTM08700 onwards for detailed guidance on the application of ICTA88/S768B and ICTA88/S768C.

How the current rules work

ICTA88/S768D works as follows. Where Section 768, 768B or 768C apply to restrict the set off of trading losses or excess management expenses and, with effect from 10 February 2005, non-trading loan relationship deficits, Section 768D will also automatically apply to restrict the set off of any CT Schedule A loss in the same way. So, for example, where Section 768 applies to prevent trading losses being carried forward after the change of ownership because there has been a major change in the nature of the trade, any CT Schedule A loss cannot be carried forward either. Likewise, where Section 768C applies to prevent excess management expenses and, with effect from 10 February 2005, non-trading loan relationship deficits arising before a change of ownership from franking a chargeable gain arising within three years of that change on an asset transferred intra group, Section 768D acts to stop that gain being franked by any CT Schedule A loss which arose before the change - ICTA88/S768D (1) & (6).

In addition, in the case of a company which is not an investment company or, from 1 April 2004, a company with investment business, Schedule A losses arising before a change of ownership cannot be set off against profits arising after that change if either:

  • within three years of that change there is also a major change in the nature or conduct of the Schedule A business,

or

  • the change of ownership occurs at any time after the scale of activities of the Schedule A business has become small or negligible and before there is any considerable revival of that Schedule A business - ICTA88/S768D (8).

See CTM06370 for guidance on the interpretation of the ‘major change’ test and CTM06390 for guidance on the ‘small or negligible’ test.

The accounting period in which the change of ownership takes place is split into two notional periods for the purposes of determining which CT Schedule A losses arise before the change, and are therefore subject to the restriction - ICTA88/S768D (3) & (4).