The corporate income loss restriction (CILR) regime is to be extended to include a corporate capital loss restriction (CCLR). This means that from 1 April 2020 capital losses carried-forward can only be used to offset 50% of any net chargeable gains, subject to any allocation of a group’s annual £5m deductions allowance. There will be no change to the basic rule that capital losses can only shelter chargeable gains. Chargeable gains can also be sheltered by income losses carried-forward apart from pre-April 2017 trading losses.
It is proposed that the £5m annual deductions allowance available to a group of companies can be used to access losses carried-forward, either income or capital, without restriction up to an aggregate of £5m per annum. HMRC believes it will mean that 99% of taxpayers should not be affected by the CCLR. Although groups will need to allocate the £5m allowance between companies, between income and capital losses and, if there are pre-April 2017 losses, between trading and non-trading. The new CCLR rules will not apply to individuals nor to a REIT’s property rental business.
Transitional rules will require the accounting period straddling 1 April 2020 to be split into two notional periods (P1, P2) and any chargeable gains or losses should be allocated between the two. If one notional period has a net allowable loss, it can be treated as an in-year loss for the other notional period, so avoiding any carry-forward restriction for that year.
For example, a gain in P1 can be sheltered by a loss in P2 (no CCLR) and by capital losses brought forward (no CCLR). Conversely a P2 gain can be sheltered by a P1 loss (no CCLR) and by capital losses brought forward (CCLR). The full £5m annual allowance, without time apportionment, can be allocated to notional period P2.
There will be anti-forestalling provisions to prevent tax avoidance around the transition. The new consultation document cites examples of what the government would consider abusive such as bed and breakfast transactions, the use of connected parties outside the CGT group or transfers with deferred completion dates. However, a vanilla sale and leaseback transaction should be acceptable.
There is a requirement to aggregate in-year capital losses with chargeable gains before accessing carried-forward losses. Exceptions are being made for ‘clogged’ losses and for ‘streamed’ pre-entry losses which can be used in priority to current year capital losses. Conversely, if there are excess in-year reliefs such as non-trade debits, these must be applied first and may reduce the amount of carried-forward losses, income or capital, which may be used.
The lumpy nature of capital gains could present problems. For instance, where otherwise dormant companies realise a gain in a 1-day tax accounting period. It may nonetheless be possible to allocate the £5m annual allowance without time apportioning, that said, the proposed condition that no group company has chargeable sources of income is very restrictive.
From a planning perspective (and only to the extent it is commercially appropriate) it would be sensible to (i) crystallise gains before 1 April 2020 and (ii) defer crystallising losses until the period in which a gain is expected to arise. The negligible value claim rules may facilitate this to some extent.
Draft legislation has been made available for comment, and will then be included in Finance Bill 2019/20 later this year with the CCLR coming into effect on 1 April 2020.
Back to Draft Finance Bill 2019/20