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This analysis is part of the Lexis®PSL Tax team's summary of the Spring Budget 2017. Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.
In order to address a perceived unfairness in the tax code that can be exploited for avoidance, the government is removing an ability for businesses to convert capital losses into trading losses with immediate effect.
Where a capital asset is appropriated to trading stock, there is a deemed disposal for CGT purposes at market value. Currently, however, businesses can elect for an alternative tax treatment which can be particularly advantageous where a capital loss would otherwise have arisen on the deemed disposal. In such a case, the effect of the election is to reduce the allowable loss to zero and to increase (by the equivalent amount) the market value of the asset which can be brought into account as expenditure in computing trading profit. Effectively, such an election converts what would be a capital loss into a more useful trading deduction that can be offset against the total trading profits of the business.
Draft legislation released alongside Spring Budget 2017 (together with an explanatory note) removes the ability to make such an election where an appropriation to trading stock would give rise to a loss for chargeable gains purposes, meaning that an allowable loss is crystallised when the appropriation takes place and remains within the chargeable gains rules. This change has effect for appropriations to trading stock made on or after 8 March 2017 (ie the date of Spring Budget 2017). This measure will be included in FB 2017.
Similar changes are also being made to the equivalent rules relating to assets within the charge to the annual tax on enveloped dwellings (ATED), with the result that the current ability to make an election in respect of the non-ATED
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