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Following Royal Assent to the Finance Act 2007 on 19 July 2007, HMRC have published revised guidance for the capital gains tax (CGT) TAAR for avoidance through the creation and use of capital losses.

Draft anti-avoidance legislation was originally published at Pre-Budget Report 2006 targeting arrangements intended to avoid UK tax through the creation and use of contrived capital losses. The resulting legislation is contained in Finance Act 2007, s 27.

Broadly, the legislation applies to capital losses which arise on disposals on or after 6 December 2006 and give rise to a tax advantage. Where the legislation applies to a capital loss, the loss will not be an “allowable loss” and may not, therefore, be set off against chargeable gains, nor against income, to reduce liability to capital gains tax, income tax or corporation tax. The new legislation replaces the legislation which applies currently to capital losses of companies subject to corporation tax, but does not alter its effect.

Besides continuing to apply to companies liable to corporation tax in respect of chargeable gains, the legislation now applies also to any person liable to tax on capital gains, including individuals, trustees, and the personal representatives of deceased persons. However, because it is targeted at arrangements that are intended to avoid UK tax, most persons will not be affected, nor will it apply to the majority of transactions undertaken. In particular, it is unlikely that individuals with a normal portfolio of investments who make disposals in the ordinary course of managing their portfolio would be affected by these new rules because there is currently little evidence to suggest that such individuals undertake the type of arrangements that are targeted by this legislation.

The new rules do not apply to a simple sale at arm’s length of an investment standing at a loss and the setting of that loss against gains, utilising the statutory relief for losses. Such a transaction does not constitute arrangements whose main purpose is to secure a tax advantage, as the main purpose is the disposal of the unprofitable investment.

The legislation is intended to have effect where a person enters deliberately and knowingly into arrangements to gain a tax advantage.

The effect of the legislation will be to restrict the use of capital losses resulting from the arrangements where the gaining of a tax advantage is the main purpose or one of the main purposes of the arrangements.

The guidance explains HMRC's interpretation of TCGA 1992, s 16A and how the legislation applies. The guidance does not affect a taxpayer’s right to argue for a different interpretation, if necessary in an appeal to the General or Special Commissioners.

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HMRC guidance: Capital Gains Tax - Avoidance through the creation and use of capital losses