Under current law, where a business subject to corporation tax
or income tax reallocates an existing asset into its trading stock,
the basic rule is that there is a deemed market value disposal of
the asset for capital gains purposes and a capital gain or loss may
arise. For many years the law has included the possibility for the
taxpayer to elect to eliminate this capital gain or loss by
effectively rolling this over into the future trading profit or
loss on a future disposal of the asset (i.e. if a capital gain
would have arisen, the election converts this into a higher trading
profit on the ultimate disposal).
This change only allows the election where the appropriation
gives rise to a capital gain, and not a capital losses. Thus,
losses arising on appropriations to trading stock will crystallise
as capital losses.
An equivalent change will be made in relation to assets within
the Annual Tax on Enveloped Dwellings (ATED) regime.
Who will be affected?
Any taxpayers undertaking appropriations of assets into their
trading stock that result in capital losses. Such transactions may
occur in particular in the real estate and financial sectors but
the rules are not limited to any particular industry groups.
The change in law will have immediate effect (i.e. for
appropriations into trading stock undertaken on or after 8 March
This seems to be a reaction to a perceived tax avoidance
opportunity arising from the current law – in particular
because making the election in cases of capital losses may result
in higher trading losses arising, and the use of trading losses to
shelter other taxable profits is more flexible than the use of
capital losses (which may only be offset against capital
In light of this it is not surprising that the law has been
tightened, given the government's stated intention to maintain
fairness in the tax system and eliminate opportunities for
avoidance. However, there will inevitably be some taxpayers
undertaking such appropriations for purely commercial reasons that
find themselves with a capital loss that may not be readily
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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