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Corporate Loss Restriction to now include Capital Losses

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Lucy Mangan - Menzies Accountant

Lucy Mangan – Business Tax Specialist

From April 2020 more changes are coming into force which effect the way UK companies, and unincorporated entities taxed as companies, can offset unused losses brought forward from prior years.

What’s changed since April 2017?

Changes were previously brought in from 1 April 2017 that reformed the way losses from prior years could be used by companies.  The 2017 changes brought both a positive and negative change, a relaxation of the way losses could be offset no longer needing to be ‘streamed’, but also a restriction in some cases on how many taxable profits of a later years could be reduced by losses brought forward.  For more details of these rules see our previous Corporate loses feature

Capital losses were excluded from the 2017 changes and remained available to offset against capital gains in later years without any restriction.

Following consultation further changes are however now coming in from 1 April 2020 which will bring capital losses into the restriction.  Unlike in 2017, there is no relaxation of the way capital losses brought forward from prior years can be offset, they will still only be able to reduce capital gains and not say trading profits.  

This could have significant tax impact on companies which have large brought forward capital losses and are likely to make large capital gains in future.

So what will this mean in practice after 1 April 2020 ?  

  • The ‘annual deductions allowance’ for 100% relief for brought forward losses of £5 million will now need to include any capital loss offset
  • Companies will be able to elect as to how this £5 million is allocated between capital and other losses
  • Subject to the £5 million deductions allowance capital gains will only be able to be reduced by capital losses brought forward from prior periods by a maximum of 50%
  • Special rules will apply for periods straddling 1 April 2020 , e.g. 31 December 2020.  A notional period will arise for capital gains only. In respect of brought forward capital losses gains will be treated under the old rules if they arise up to 31 March 2020 and the new rules if they arise post 1 April 2020.  Although note that if capital gains and losses arise in the same accounting period (e.g. 31 December 2020) they can still be fully offset without restriction. 
  • There are no changes to the group election to treat capital gains arising in another group company
  • Capital gains and capital losses arising in the same period will continue to be offset without restriction

What can be done?

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There are measures in place to prevent companies artificially creating capital gains before 1 April 2020 however, if a company is commercially in the process of making a disposal which is going to crystallise a capital gain then if possible it may be worth ensuring this takes place before 31 March 2020.   Professional advice should be sought to confirm the position.

Going forward if commercially viable crystallising both gains and losses in the same period is likely to ensure the most efficient tax relief if the restriction would otherwise apply.

Finally good tax planning, particularly within groups, will be even more key going forward to ensure tax efficiency as much as possible and if nothing else that budgets and cash flow have taken any additional tax into account.

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