UK: Spring Budget 2017 Analysis - Corporation Tax And Income Tax: Appropriations To Trading Stock

The measure

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.

When?

The change in law will have immediate effect (i.e. for appropriations into trading stock undertaken on or after 8 March 2017.)

Our view

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 gains).

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 utilised.

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.