Capital Loss Restrictions explained

Nick Lovett explains how the new ‘deductions allowance’ will work

Schedule 45 of the Finance Act 2020 introduces a corporate capital loss restriction. The Act received Royal Assent on 22 July 2020.

The provisions will apply to accounting periods beginning on or after 1 April 2020 and has provisions for accounting periods which straddle that date and include anti-forestalling provisions.

The major effect of the legislation is that companies making chargeable gains will only be able to offset up to 50% of those gains using carried-forward (allowable) capital losses.

The measure includes an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year.

Government sources anticipate that 99% of companies will be unaffected by the restriction.

In essence there are two reforms:

  1. A restriction in the use of carried forward capital losses, as detailed above.
  2. A modification to the utilization of brought forward trading losses.

A Corporate Income Loss Restriction (‘CILR’) for carried-forward income losses was introduced in 2017 which included an allowance that the first £5m of profits per group could be offset with carried-forward losses before the 50% restriction is applied. This is extended to offset against chargeable gains.

This created a new allowance referred to as “the deductions allowance”.

This allowance applies only to determine the amount of carried-forward losses a company can use. It is not a tax-free allowance and does not itself provide any relief from tax. Rather, it enables companies to gain greater use of their carried-forward losses than would otherwise be possible in accordance with the restriction.

This deductions allowance can now also be set against chargeable gain.

A company’s tax return must specify the amount of deductions allowance it is entitled to for the period unless it is not claiming relief for any carried-forward losses to which the restriction applies.

If companies are in a group and the nominated company for that group has submitted a group allowance allocation statement, the individual companies still each need to specify the amount of their deductions allowance in their individual tax returns. They can do this, for example, by including the amount of their deductions allowance in their tax computations.

The computation of the allowance is complex, and it is suggested that further advice is sought when necessary.

Additional rules apply in certain circumstances, particularly for companies in liquidation, life insurance companies and those with ring-fence profits.

The rules are modified in cases for insolvent companies.

By this the legislation allows a relaxation of the rules (detailed below) where a company has gone into insolvent liquidation as follows:

  1. The liquidation is within the meaning of Section 247 (2) Insolvency Act 1986 (or Article 6 (2) Insolvency (Northern Ireland) Order 1989, and
  2. At the time it goes into liquidation, the assets are insufficient for the payment of the company’s debts, other liabilities band the expense of the winding up.

In these circumstances, the deductions allowance is increased by the amount of the chargeable gains arising in the period or (if lower) the amount of any allowable losses accruing to the company previously so far as not already deducted.

There are some minor restrictions to this rule which mainly apply to no gain/no loss disposals and to transfers of assets within groups. Further advice should be sought if these apply.

• Nick Lovett Tax manager, Vantage

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