HMT / HMRC have now published the outcome to the consultation on the restriction of loss relief for corporate capital losses.
The consultation is here
And accompanying draft legislation is here
I think the new legislation will be included in FA 2020.
The result is a mixture of good and bad news:
I think the new legislation will be included in FA 2020.
The result is a mixture of good and bad news:
The bad news is that for accounting periods commencing after 1 April 2020 the offset of brought forward corporate capital losses is limited to 50% of the capital gains of a subsequent accounting period plus an additional deductions allowance of up to £5m. (But there is only one £5m deduction allowance for a group of companies and the £5m is a total amount which has to be shared between trading, non -trading and capital losses.)
HMT / HMRC are stuck in only thinking about loss reliefs as a source of additional revenue or as a means of attracting inward investment. There is no acknowledgement that simplicity, equity between tax payers and economic efficiency should be features of a system of taxation; the result is legislation that lacks coherence and is wildly over complicated for the amount of revenue raised.
But for life companies there is good news. It was originally intended the capital loss relief restrictions would apply to the shareholder's share of BLAGAB losses(i.e. losses referable to BLAGAB.) when those losses were set against BLAGAB gains of a subsequent period. As well as being an unwelcome restriction on loss utilisation, this would have made allowing for capital losses in the pricing of unit linked funds even more complicated than it is at present.
Happily in the outcome to the consultation HMT / HMRC conclude "The Government will therefore legislate to ensure that there is no restrictionn of BLAGAB losses against BLAGAB gains." This is a very welcome change and life insurance companies that only have BLAGAB gains and losses (which is probably most life insurance companies) will be unaffected by the new capital loss rules.
Reading through the legislation for the first time I rather struggled to see how it worked to ensure there was no restriction on the offset of BLAGAB losses against BLAGAB gains. The rules do work, however, and I have made some notes on the mechanics below.
Legislation
Legislation Prior to Restriction
TCGA 1992 section 2A provides for capital gains of an accounting period to be calculated net of losses of the period and losses brought forward from earlier periods.
For life insurance companies section 2A is subject to TCGA 1992 section 210A. This section divides life insurance capital gains into BLAGAB and non - BLAGAB amounts. BLAGAB gains / losses are, the amount of total gains referable to BLAGAB.
Non - BLAGAB gains / losses as defined by TCGA 1992 210A is rather confusing terminology, it doesn't mean gains referable to the non - BLAGAB computation but, rather gains and losses calculated using CGT rules other than BLAGAB gains and losses. As far as I can see all that would be included in this category would be assets subject to capital gains tax that are part of the life insurers long term business fixed capital.
Section 210A (10A) - 10C) prescribes a methodology for identifying a shareholder proportion of BLAGAB gains and losses. TCGA 210A (2) limits the offset of non - BLAGAB losses to the shareholder share of BLAGAB gains. And TCGA 210A (3) - (9) sets out the rules which allow the shareholder share of BLAGAB losses to be set against non - BLAGAB gains.
TCGA 1992 section 2A provides for capital gains of an accounting period to be calculated net of losses of the period and losses brought forward from earlier periods.
For life insurance companies section 2A is subject to TCGA 1992 section 210A. This section divides life insurance capital gains into BLAGAB and non - BLAGAB amounts. BLAGAB gains / losses are, the amount of total gains referable to BLAGAB.
Non - BLAGAB gains / losses as defined by TCGA 1992 210A is rather confusing terminology, it doesn't mean gains referable to the non - BLAGAB computation but, rather gains and losses calculated using CGT rules other than BLAGAB gains and losses. As far as I can see all that would be included in this category would be assets subject to capital gains tax that are part of the life insurers long term business fixed capital.
Section 210A (10A) - 10C) prescribes a methodology for identifying a shareholder proportion of BLAGAB gains and losses. TCGA 210A (2) limits the offset of non - BLAGAB losses to the shareholder share of BLAGAB gains. And TCGA 210A (3) - (9) sets out the rules which allow the shareholder share of BLAGAB losses to be set against non - BLAGAB gains.
FA 2012 section 75 defines BLAGAB chargeable gains as gains that accrue on the sale of assets held for the purposes of a company's long term business and states that BLAGAB gains for a period are net of BLAGAB losses of that period and BLAGAB gains brought forward.
Revised Legislation
TCGA 1992 section 2A which provides that chargeable gains are calculated net of chargeable losses is unchanged by the draft legislation. However, the draft legislation includes a new CTA 2010 section 269ZBA which restricts the offset of brought forward capital losses to a "relevant maximum" which is 50% of the gains of a future period plus the chargeable gains deductions allowance for the period (i.e the £5m offset per group which is shared across all loss types). There is nothing in TCGA 19922A which hints at the existence of 269ZBA which is in keeping with the clunky drafting which characterises all the new loss relief legilsation.
The legislation in TCGA 210A (10A) - 210 (10C) is unchanged by the revisions. Accordingly the calculation of the shareholder proportion of BLAGAB gains is unaltered. However, a new section CTA 2010 269ZFC is introduced to restrict the offset of brought forward non - BLAGAB losses against the shareholders share of BLAGAB gains, introducing the same 50% plus the appropriate amount of the deductions allowance rule set out in section 269ZBA. The rules here are very complicated and are not covered in this post.
However, the most important point is that there is nothing in the proposed amendments to the legislation to change FA 2012 section 75. Accordingly, BLAGAB gains are calculated as before, i.e. with the offset in full of BLAGAB losses against BLAGAB gains. And this point is reinforced by an amendment to TCGA 1992 210A(13) which makes it clear BLAGAB chargeable gains are calculated net of BLAGAB chargeable losses. It is only when loss relief is being considered across the non - BLAGAB / BLAGAB divide that the 50% limitation comes into effect.
Revised Legislation
TCGA 1992 section 2A which provides that chargeable gains are calculated net of chargeable losses is unchanged by the draft legislation. However, the draft legislation includes a new CTA 2010 section 269ZBA which restricts the offset of brought forward capital losses to a "relevant maximum" which is 50% of the gains of a future period plus the chargeable gains deductions allowance for the period (i.e the £5m offset per group which is shared across all loss types). There is nothing in TCGA 19922A which hints at the existence of 269ZBA which is in keeping with the clunky drafting which characterises all the new loss relief legilsation.
The legislation in TCGA 210A (10A) - 210 (10C) is unchanged by the revisions. Accordingly the calculation of the shareholder proportion of BLAGAB gains is unaltered. However, a new section CTA 2010 269ZFC is introduced to restrict the offset of brought forward non - BLAGAB losses against the shareholders share of BLAGAB gains, introducing the same 50% plus the appropriate amount of the deductions allowance rule set out in section 269ZBA. The rules here are very complicated and are not covered in this post.
However, the most important point is that there is nothing in the proposed amendments to the legislation to change FA 2012 section 75. Accordingly, BLAGAB gains are calculated as before, i.e. with the offset in full of BLAGAB losses against BLAGAB gains. And this point is reinforced by an amendment to TCGA 1992 210A(13) which makes it clear BLAGAB chargeable gains are calculated net of BLAGAB chargeable losses. It is only when loss relief is being considered across the non - BLAGAB / BLAGAB divide that the 50% limitation comes into effect.
