CG47000 - Restrictions: capital losses: introduction

Background

There are restrictions on the use of allowable losses when companies move between groups.  The rules were originally introduced in 1993 to counter “loss-buying”.  At its most extreme that is where a profitable group acquires a company with no assets but has realised substantial capital losses.  When the group realises capital gains these can be transferred to the company with losses under TCGA92/S171A.

Similarly, it would be possible for a group to sell a subsidiary that is to realise a gain to another group with surplus losses, known as “gain-buying”.

The development of legislation

introduced S177A and Schedule 7A TCGA to address loss-buying.  This applies restrictions to the use of “pre-entry losses” where a company becomes a member of another group.  Such losses can only be set against “pre-entry gains” which are principally gains on assets the company held before it joined the group or those on assets acquired for use in a trade that it was conducting before joining.  A portion of a loss on an asset that was held by the company at the point it changed group was also a pre-entry loss.  The apportionment being made on the basis of time with the option to elect for one to be made based on the market value of the asset at the time of the change in ownership.

introduced S177B and Schedule 7AA to address gain-buying.  It operated in a broadly similar way to Schedule 7A.

introduced S184A to S184F which constitute  Targeted Anti-Avoidance Rule (TAAR) that prevents the use of capital losses where a company changes ownership where a main purpose of acquiring the company is to obtain a tax advantage.  The introduction of this purpose-based TAAR allowed the gain-buying rule in Schedule 7AA to be repealed.  However, Schedule 7A was retained to provide the streaming of losses.

included various simplification measures for the capital gains group rules.  These included removing those parts of Schedule 7A that were no longer considered necessary following the introduction of the TAAR.

Archived guidance

The guidance on loss- and gain-buying was reviewed in 2019 and certain material archived.  This can be accessed through earlier versions of the HMRC website held by the National Archives.

The archived material is –

CG47000 to CG47011: introduction (content of original page 47000 can be found at 47001)

CG47520 to CG48007: loss-buying rules applying from 1993 to 2011

CG48200 to CG48224: gain-buying rules from 1996 to 2006