Capital losses - new restrictions

Currently UK companies have been able to offset brought forward capital losses against chargeable gains without a limit. Draft legislation has been published to restrict the use of brought forward capital losses to 50 per cent of gain realised in an accounting year. This brings the treatment into line with the similar rule which has applied to non-capital losses since April 2017. Corporate groups are entitled to the first £5m of total profits to be unrestricted and this deduction may be allocated against both income profits and chargeable gains. These new rules are due to commence from 1 April 2020.

REITs are subject to specific tax rules and are generally not subject to tax on the gains realised on assets used in their REIT business. This change will not apply to capital losses that are attributed in respect of Property Income Distributions.

For companies, such as non-resident companies, with single day accounting periods as a result of realising a chargeable gain, the £5m is not reduced. This could apply where, for example, a non-resident holding company disposes of its material investment in a 'UK property rich' vehicle and would be subject to corporation on the gain on sale.

This measure will have a dramatic effect on the property industry. Investors commonly realise large capital gains after a number of years of ownership. Tax exposure has traditionally been reduced through the use of large capital losses brought forward as well as indexation allowances which were frozen in January 2018. Investors will need to consider the timing of disposing of properties. For example, if a company with a 31 December year end disposed of a property with a £10m loss on 1 January 2021 and realised a gain on another property on 31 December 2021, the gain could be fully sheltered by the loss. However, if the loss arose one day earlier on 31 December 2020, only £7.5m could be offset against the gain in 2021.

Property investment companies should also revisit their deferred tax positions where they have previously relied on the availability of capital losses to mitigate future gains. Substantial enactment of Finance Bill 2019/20 prior to the end of this year means that affected groups reporting for the period to 31 December 2019 should be expected to make appropriate tax provisions in their financial statements.

Disposal strategies need to be more carefully thought through. Please contact Adrian Benosiglio or Riaz Farooqi in our real estate tax team for more information.