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Consultation on corporate capital loss restriction

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HMRC is consulting until 25 January 2019 on restricting companies’ carried-forward capital losses to 50% of the capital gains arising in an accounting period, with effect from 1 April 2020. An anti-forestalling measure will have effect on and after Budget day on 29 October 2018. The government intends to introduce legislation for the changes in Finance Bill 2020.

This consultation considers the method for implementing the restriction and proposes specific exemptions for certain life assurance business and ring-fenced profits of UK oil and gas companies. The same allowance of £5m per group that applies to the corporate income loss restriction from April 2017 will be available to cover capital gains that can be offset with carried-forward capital losses. HMRC says this allowance will ensure that over 99% of companies remain financially unaffected by both restrictions.

The intention is to mirror as far as possible the model used for the 2017 corporate income loss reforms to calculate the restriction to be applied against capital gains. This includes aspects such as definitions of groups and the methodology for the allocation of deductions allowance between group members.

HMRC proposes a five-step approach to the calculation:

  • allocate part of the £5m group deductions allowance to the capital loss restriction;
  • perform the income loss restriction computation using the balance of the allowance;
  • allocate the deductions allowance to net capital gains;
  • calculate the maximum amount of carried-forward losses that can be set against gains; and
  • allocate carried-forward losses against capital gains.

A targeted anti-avoidance rule will counter arrangements that seek to exploit the deductions allowance, such as manipulation of a group structure to maximise the amount of the annual allowance due. An anti-forestalling measure, with retrospective effect from 29 October 2018, will be introduced to eliminate any tax advantage from contrived arrangements that cause capital gains to accrue artificially on assets before the loss restriction comes into force.

Transitional arrangements will apply to companies with accounting periods that straddle 1 April 2020. The consultation proposes that the accounting period be split into two notional accounting periods, one ended on 31 March 2020, the other commencing 1 April 2020. The restriction will apply only to gains arising in the notional period from 1 April 2020.

Special rules will apply to life assurance companies, to ensure the measure will not impact individuals through the policyholder share of basic life assurance and general annuity business (BLAGAB) gains. The consultation seeks views from the life assurance industry on the appropriate method of calculation.

The government also proposes to exclude ring-fenced capital gains of companies involved in UK oil and gas extraction from the scope of the restriction.

HMRC intends to publish draft legislation in summer 2019 for a period of technical consultation ahead of its inclusion in Finance Bill 2020.