As announced in the Autumn Budget, Finance Bill 2020 will introduce a restriction on the amount of capital losses which companies can set off against capital gains in later accounting periods. The UK has historically been generous in its use of carried-forward capital losses, applying neither a monetary cap nor a time limit, but this new restriction will affect groups realising large gains who may no longer be able relieve the entire taxable gain by use of carried-forward losses. The Government maintains that the vast majority of companies will be unaffected by the new restriction due to a £5 million annual allowance for each group.
Draft legislation has now been published and the restriction will apply to gains arising on or after 1 April 2020. It will build on a similar restriction on carry forward of income losses introduced in 2017, so it is helpful to recap on that before considering the extension to capital losses.
Corporate Income Loss Restriction (CILR) introduced two key changes to carried-forward loss relief which applied only to income losses:
- a relaxation: losses arising from 1 April 2017 could be carried forward and set against all types of profits in later years, including by way of group relief. Previously, losses were streamed and companies were only allowed to set carried-forward losses against profits of a specific type, e.g. trading losses against future profits of the same trade; and
- a restriction: carried-forward losses (whenever arising, including before 1 April 2017) could only be used to relieve 50% of the profits in an accounting period, but with a deductions allowance of £5 million per group so that £5 million plus 50% of remaining profits could be relieved by carried-forward losses. For example, if a company had £25 million of profits in 2018/19 and £50 million of losses carried forward from earlier years, £15 million of the carried-forward losses could be set against the 2018/19 profit (the £5 million deductions allowance plus 50% of the remaining £20 million profit), leaving £10 million subject to corporation tax for 2018/19. The unused £35 million of losses could be carried forward and offset against profits in later years subject to the same £5 million plus 50% restriction.
Capital losses were not affected by the CILR and remained generally available to be carried forward without limit.
Finance Bill 2020 will extend the restrictive element of the CILR provisions to capital losses by amending Part 7ZA of the Corporation Tax Act 2010. It will restrict companies’ use of carried-forward capital losses to 50% of the capital gains arising in an accounting period, subject to the existing £5 million deductions allowance which a group will now have to allocate between capital as well as income losses. It will apply to gains arising on or after 1 April 2020 (and apply to the post-31 March 2020 portion of an accounting period straddling 1 April 2020) but the restriction will apply to all carried-forward capital losses, whenever arising.
The restrictions will not apply to current year capital losses. Companies will still be able to set these against gains in the same year without restriction.
As mentioned above, the CILR was not all bad news. It also extended the categories of profits which could be relieved by carried-forward income losses. There is no equivalent relaxation for carried-forward capital losses; they will only be available to relieve capital gains in future years, not income profits.
The £5 million deductions allowance applies for a twelve-month period and, where a company has an accounting period of less than twelve months, the £5 million allowance is generally pro-rated. However companies which have one-day accounting periods, in particular non-resident companies which dispose of UK land and are liable to corporation tax on the capital gain but not otherwise within the charge to corporation tax, will be able to claim the full £5 million deductions allowance for the financial year. In addition, companies with two or more one-day accounting periods in a financial year will be able to offset allowable losses against chargeable gains accruing in the same financial year without restriction.
The new restriction will not apply to:
- the carry forward of Basic Life Assurance and General Annuity Businesses (BLAGAB) losses against the shareholders’ share of BLAGAB gains;
- ring-fenced allowable capital losses arising in certain UK extraction activities of oil and gas companies; or
- real estate investment trusts (REITs) where the capital losses are attributable to property rental business.
Generally current year losses will be used before carried-forward losses. However, this could make it more difficult for companies to use certain types of carried-forward losses which can only be set against specific capital gains, for instance losses on connected party disposals and pre-entry losses. Specific rules will be introduced to enable companies to prioritise the use of such carried-forward losses over current year losses.
Anti-forestalling measures are designed to prevent companies from taking steps to circumvent the new restrictions, e.g. by artificially triggering capital gains before 1 April 2020. The anti-forestalling provision is expressed as a purpose test and comes into effect where a company enters into arrangements on or after 29 October 2018 with a main purpose of securing a tax advantage by reason of the capital loss restriction not having yet come into effect.