CFM55070 - Derivative contracts: chargeable gains on derivatives: carry back of losses: examples
CTA09/S663, 664
Examples of carrying back a loss
Example 1
A company enters into three property derivative contracts in its 12-month accounting period ended 31 December 2005, and continues to hold them in the year ended 31 December 2006. CTA09/S641 gains and losses on these contracts are as follows (losses in brackets):
| - | Y/e 31 December 2005 | Y/e 31 December 2006 |
|---|---|---|
| 1 | 拢700,000 | - 拢150,000 |
| 2 | - 拢100,000 | - 拢800,000 |
| 3 | 拢1,400,000 | 拢200,000 |
In addition, the company has an allowable loss of 拢1,500,000 in 2005 from a disposal of land, and in 2006 it has a non-derivative chargeable gain of 拢600,000. At 1 January 2005, it has no capital losses brought forward.
In the year ended 31 December 2006, it has aggregate losses from its derivative contracts of 拢950,000, and a gain from derivative contracts of 拢200,000. It therefore has net S641 losses of 拢750,000.
In the year ended 31 December 2005, it has total derivative contract gains of 拢2,100,000 (amount G) and derivative contract losses of 拢100,000 (amount L). In addition, it has non derivative contract losses (amount N) of 拢1,500,000. Its net S641 gains for the period (G - (L+N)) are therefore 拢500,000.
For the year ended 31 December 2005, the company will initially pay tax on chargeable gains of 拢500,000. Having sustained derivative contract losses in 2006, the company might claim to carry back 拢500,000 of that loss to 2005. If it makes such a claim, its 2005 self-assessment will be amended to reduce the chargeable gain to nil. For 2006, its derivative contract losses will be reduced to 拢250,000; this amount is deducted from the 拢600,000 gain in the year, so that the company will have total gains of 拢350,000.
The company is not obliged to claim in respect of 拢500,000. It might, for example, claim to carry back only 拢150,000 of the loss, setting the remaining 拢600,000 against the chargeable gain in 2006. Or it may make no claim at all, in which case 拢600,000 of the loss will be used in 2006 and the remaining 拢150,000 carried forward.
Example 2
The facts are as in example 1, except that at 1 January 2005 the company has capital losses of 拢1,000,000 brought forward. Its total non S641 losses for 2005 are therefore 拢2,500,000 - the 拢1,500,000 loss on the property disposal in the year, plus the 拢1,000,000 losses brought forward. This amount, added to the 拢100,000 derivative contract losses, exceed the derivative contract gains for the year. The company therefore has no capacity to carry back losses from 2006.
Example 3
The facts are as in example 2, except that in the year ended 31 December 2005, another company (X Ltd) in the same group as the taxpayer company disposes of a property to an external party. In the year ended 31 December 2006, X Ltd and the taxpayer company jointly elect under TCGA92/S171A (as it applied at that time) that the disposal is treated as having been made by the taxpayer company. In consequence, a chargeable gain of 拢2,300,000 accrues to the company for 2005.
The total losses to set against gains in 2005 (拢2,500,000) are first of all set against the non S641 gain of 拢2,300,000. A residue of losses (amount N) of 拢200,000 remains. The total of amount N and amount L (the paragraph 45A losses for the year - 拢100,000) is deducted from the 拢2,100,000 derivative contract gains.
We therefore have:
Net S641 gains = 拢2,100,000 - (拢100,000 + 拢200,000) = 拢1,800,000
The company can therefore claim to carry back the full amount (拢750,000) of net S641 losses accruing in 2006.