CG47941 | Groups to which loss set-off restrictions apply: connected groups

From HM Revenue & Customs · Capital Gains Manual

The Schedule 7A rules apply separately to each of the connected groups for the purpose of determining whether any loss is a loss on the disposal of a pre-entry asset, and for calculating the pre-entry proportion of the loss. If there is a loss on an asset which is a pre-entry asset in relation to more than one of the connected groups, the pre-entry proportion of the loss is the largest pre-entry proportion calculated for any of the connected groups.

Note: Additional rules relating to loss buying were enacted in FA 2006. See CG47020+ for guidance on the rules which apply in priority to TCGA92/SCH7A for accounting periods ending on or after 5 December 2005.

FA11/S46 and FA11/SCH11 greatly simplified the rules in TCGA92/SCH7A for the deduction of losses on or after 19 July 2011. See CG47400+ for guidance on loss streaming from that date.

TCGA92/SCH7A/PARA9 (6)

TCGA92/PARA9(6)/SCH7A) deals with the interaction between para 9 and TCGA92/S170 (10). The general rule in Section 170(10), see CG45190, is that if the principal company of one group becomes a member of another group, the two groups are regarded as the same. For the purposes of paragraph 9 Schedule 7A, paragraph 9(6) disapplies Section 170(10) in the case where either

The principal company of group A becomes a member of group B, and immediately before that event the principal company of group A was controlled by a company which was then a member of group B.
This stops the Section 170(10) rule affecting the separate application of Schedule 7A to connected groups in cases where the principal company of one connected group becomes a member of another connected group

(With effect for any accounting period ending on or after 17 March 1998) in cases where the two groups are not connected - see above - a company joins a group and later in the same accounting period the principal company of that group becomes a member of another group.

This rule, which was introduced by FA98/S138, prevents groups from using an intermediate group structure to avoid both the loss buying rules in TCGA92/SCH7A and the gain buying legislation in Schedule 7AA, see CG48200+. The example below is an illustration of one type of circumstance in which paragraph 9(6) would apply.

EXAMPLE

STAGE 1

A small subgroup, headed by GV, leaves a group (`the gain group') with valuable asset Y, which it acquired from an independent third party, so there is no degrouping charge on GV in respect of asset Y when it leaves the gain group.

STAGE 2

The subgroup is now a capital gains group in its own right (the second group). GV crystallises the gain by selling asset Y to a third party. During this stage the second group also acquires company LV, a company which has left the group headed by L (`the loss group') with asset Z on which there is an unrealised loss. Loss asset Z is then transferred from LV to GV under the no gain/no loss provision in TCGA92/S171(1).

STAGE 3

The L group acquires GV and its subsidiaries. GV then disposes of loss asset Z and crystallises the loss.

In this example, the gain buying rules in TCGA92/SCH7AA would be ineffective because the loss on asset Z would be a qualifying loss available against the pre-entry gain, see CG48205. Before amendment by FA98/S138 the loss buying rules in TCGA92/SCH7A would also be ineffective, because they would treat the second group and the L group as the same group. GV would be treated as joining this group at the time it joined the L group, with the result that the pre-entry proportion of the loss on asset Z could be set against the gain realised on asset Y. The effect of the rule in this case would be to impose the Schedule 7A restrictions on setting-off capital losses in respect of both the second group and the L group. As a result, the loss that arises on the disposal of asset Z will be treated as a pre-entry loss in relation to the second group and will, therefore, not be eligible to set against the gain that accrues on asset Y.

FA11/S46 and FA11/SCH11 greatly simplified the rules in TCGA92/SCH7A for the deduction of losses on or after 19 July 2011. See CG47400+ for guidance on loss streaming from that date.