ATXP6 UK
Syllabus A4. Corporation Tax A4e. Group Structure for C.T.

A4evi. Pre-entry losses

Syllabus A4evi)

Determine pre-entry losses and understand their tax treatment

Pre-entry losses

A group which anticipates making disposals which will give rise to substantial capital gains might try to shelter those gains by acquiring a “capital loss company”.

This is a company which has capital losses brought forward.

The intention of the purchase of the company would be to set these capital losses against the group’s capital gains and so reduce the group’s overall corporation tax liability.

There are tax avoidance measures in place to prevent this.

They only allow group companies with realised pre-entry capital losses to set them against gains arising on the following types of disposals:

  1. Disposals of assets which the company owned before it joined the group. 

    For example, if a company has brought forward capital losses of £20,000 and sells an asset that it owned before it joined the group realising a gain of £30,000 – it can set off it’s £20,000 brought forward loss.

  2. Disposals of assets acquired by the company from outside the group since becoming a group member. 

    For example, if a company has brought forward capital losses of £20,000 and purchases an asset from a third party, after becoming a group member – and then sells the asset realising a gain of £30,000 – it can set off it’s £20,000 brought forward loss.