CG40252 - Capital loss anti-avoidance rule: Example 1

A group consists of parent company P Ltd and subsidiaries R Ltd and S Ltd. S Ltd, an investment company, is standing at a loss.

P Ltd incorporates a new subsidiary T Ltd whichis a company limited by guarantee.

T Ltd acquires all the share capital of S Ltd, a transaction to which the provisions of TCGA92/S171 cannot apply since T Ltd cannot be amember of the CG group.

In the absence of the legislation in TCGA92/S8 amended by FA 2006 (TCGA92/S16A with effect from 6 December 2006, see CG40241) a loss accrues to P Ltd on the disposal of S Ltd to T Ltd. However, as the disposal of S Ltd takes place directly in consequence of arrangements, one of the main purposes of which is to secure a tax advantage by crystallising the loss on the investment in S Ltd, the loss accruing to P Ltd is not an allowable loss.

In this example the loss is not an allowable loss as the arrangements have a main purpose to secure a tax advantage. There is no real disposal of S Ltd by P Ltd since T Ltd is wholly owned by P Ltd and has been included in the arrangements primarily because it falls outside of the capital gains group headed by P Ltd, thus triggering a disposal for tax purposes (“artificial de-grouping”). This contravenes the principle in the HMRCstatement (see CG40240 and appendix 8) that capital loss relief should only be available where there has been a genuine commercial disposal.