IFM40367 - Becoming a QAHC: interaction with loss restriction
Disapplication of loss restriction rules
PARA 21 disapplies the loss restriction rules in CTA10/PT7ZA for the purposes of determining the profits of a QAHC ring fence business but those loss restriction rules apply as normal for the purposes of determining the profits of a QAHC’s non-ring fence business.
Guidance on the loss restriction rules is at CTM04800+ . Non-trade loan relationship deficits
Example of interaction between the QAHC regime and loss restriction rules
A QAHC is set up as a new company on 1 Jan 2023. The company is not part of a group.
At 31 Dec 2023, the QAHC has the following amounts to carry forward:
| Ring fence | £m | Non-ring fence | £m |
|---|---|---|---|
| Non-trade loan relationship deficits | (10) | UK property business losses | (6) |
| Surplus management expenses | (2) | Capital losses | (8) |
For the accounting period ended 31 Dec 2024, the QAHC results are as follows:
| Ring fence | £m | Non-ring fence | £m |
|---|---|---|---|
| Non-trade loan relationship profits | 8 | UK property business profits | 6 |
| Surplus management expenses | (1) | Chargeable gains | 10 |
Ring fence computation
For amounts inside the ring fence, there is no restriction on the offset of amounts brought forward. Therefore, the final ring fence position for the period ended 31 Dec 2024 is:
| ###### | £m |
|---|---|
| Non-trade loan relationship profits | 8 |
| Less non-trade loan relationship deficits b/f | (8) |
| Taxable ring fence profits | Nil |
| Non-trade loan relationship deficits c/f (10 – 8) | (2) |
| Management expenses c/f (2 + 1) | (3) |
Non-ring fence computation
For amounts arising outside the ring fence, the loss restriction rules apply.
For a stand-alone company, the total deduction allowance will be £5m.
The company allocates £3m of this allowance as a non-trade income profits deduction allowance per CTA10/S269ZC(5) – this can be set against the UK property business profits of £6m.
The remaining £2m is treated as a chargeable gains deduction allowance per CTA10/S269ZBA(5) – this can be set against the capital gains of £10m.
The modified total profits are first calculated (CTA10/S269ZF(3) step 1).
This is the total profits of £16m before deduction of any in-year reliefs (of which there are none).
The £16m is then divided into trading profits (nil), non-trading income profits (£6m) and chargeable gains (£10m) – (CTA10/S269FZ(3) step 3) and any in-year reliefs are allocated to these amounts.
The relevant maxima are then calculated for trading profits, non-trading income profits and chargeable gains per (CTA10/S269ZF(3) step 5)
The relevant maximum for chargeable gains is calculated as follows:
- Calculate the qualifying chargeable gains (chargeable gains of the period minus any capital losses and in-year reliefs allocated to chargeable gains) = £10m
- Relevant chargeable gains are the £10m qualifying chargeable gains minus the £2m chargeable gains deductions allowance giving £8m.
- The relevant maximum for chargeable gains is 50 percent of the relevant chargeable gains plus the chargeable gains deductions allowance
£8m x 50 percent + £2m = £6m
This the maximum amount that can be relieved by carried forward capital losses.
The company had £8m capital losses carried forward and uses the full £6m allowable leaving £2m capital losses to be carried forward to the next accounting period.
The relevant maximum for total non-trading profits is calculated as follows:
- Calculate the qualifying non-trading income profits (CTA10/S269ZF(3) step 5) – These are the non-trading income profits of £6m minus any in-year reliefs giving £6m.
- Calculate the qualifying chargeable gains which is £10m (calculated above).
- Calculate the total non-trading profits deductions allowance. This is the sum of the non-trading income profits deductions allowance of £3m and the chargeable gains deductions allowance of £2m which is £5m.
- Calculate the total relevant non-trading profits. This is the sum of the qualifying non-trading income profits of £6m and the qualifying chargeable gains of £10m minus the non-trading deductions allowance of £5m which gives £11m (CTA10/S269ZF(2B)).
- Calculate the relevant maximum for non-trading profits (CTA10/S269ZC(3)). This is 50 percent of the total relevant non-trading profits plus the non-trading deductions allowance.
£11m x 50 percent + £5m = 10.5m
This is the maximum amount of streamed non-trading losses (property business losses and capital losses) that can be set against the total non-trading profits. In this case, the capital losses of £6m are deducted from the chargeable gains.
As the chargeable gains form part of the total non-trading profits, the amount of carried forward streamed property losses that can be set off will the relevant maximum of £10.5m less the capital losses set off of £6m, leaving £4.5m.
The company has £6m property business losses carried forward and uses the maximum amount available of £4.5m, leaving £1.5m carried forward to the next period.
The relevant maximum for total profits is then calculated. This is the maximum amount of profits that can be set off by restricted carried forward losses available for relief against total profits (relevant deductions).
- Calculate the relevant profits CTA10/S269ZFA(1) – these are the qualifying profits less the company’s deductions allowance for the period.
- Calculate the qualifying profits are the modified total profit minus any in-year reliefs = property business profits £6m plus chargeable gains = £16m
- Calculate the relevant profits which is the sum of the qualifying profits of £16m minus the deductions allowance of £5m = £11m
- Calculate the relevant maximum for total profits (CTA10/S269ZD(4)). This is 50 percent of the relevant profits plus the deductions allowance.
£11m x 50 percent plus £5m = £10.5m
This is the overall maximum amount of restricted losses that the company can deduct from its profits of the accounting period. The company has deducted £6m capital losses carried forward and £4.5m property business losses so it has no remaining capacity to use restricted carried forward losses.
The company’s non-ringfence profits chargeable to corporation tax are:
| £m | £m | |
|---|---|---|
| UK property business profits | 6 | |
| Less: UK property business losses c/f | (4.5) | |
| 1.5 | ||
| Chargeable gains | 10m | |
| Less capital losses c/f | (6) | |
| 4 | ||
| Total taxable profits | 5.5 |
Carried forward amounts
UK property business losses (£1.5m)
Capital losses (£2m)