CG40255 | Capital loss anti-avoidance rule: Example 4

Losses sometimes arise on the occasion of the liquidation of a group company.

The liquidation of a subsidiary company that had suffered a real economic loss, say on the failure of a construction project joint venture, would be unlikely to be caught by thelegislation. The existence of a bona fide commercial activity, the involvement of a genuine unconnected party in the venture, and explicit mention of the demise of the venture in the parent company’s published accounts would indicate that arrangements to secure a tax advantage were not a main purpose. The resultant loss would not be disallowed by TCGA92/S16A (originally introduced by FA 2006 as amendments to TCGA92/S8, see CG40241) even if the company chose to liquidate the company at the same time as a chargeable gain arose elsewhere in the group, in order that advantage could be taken of section 171A in the manner in which it was intended to be used.

On the other hand, where a group has knowingly taken steps to ensure that the loss on the liquidation of a subsidiary is not representative of a genuine commercial loss, perhaps by using the type of transactions that are mentioned in example 1, it is likely that the arrangements would be caught.

The same principles would apply in the event that a group decides to have a subsidiaryc ompany struck off, rather than to carry out the full liquidation process.