Change of Ownership and Corporate Taxable Losses

When a company changes hands, one of the key tax considerations is whether its historic losses can still be used. Tax rules are designed to prevent “loss-buying”  where a profitable business acquires a loss-making company purely to offset those losses against future profits. To prevent this practice restrictions apply when there is a change of ownership and a significant change in the way the company operates (the “Corporate Losses Restriction”).

Change in Ownership

A change in ownership occurs if:

• Within a three year period, one person acquires more than 50% of the company’s shares; or

• Within a three year period, two or more people each acquire at least 5%, and together their holdings exceed 50%.

  
  

For post-April 2017 losses the change of ownership condition is also triggered when a company joins a new group following a share acquisition.

Certain events, such as inheriting shares under a Will or receiving them as an unsolicited gift, do not count as a change of ownership. For example, shares passing to family members on death won’t trigger the Corporate Losses Restriction even if there is a change in trade.

Major Change in Trade

The rules look at a five-year window, starting up to three years before the change in ownership. If during this period there is a major change in the company’s trade, the rules are activated (so therefore carried-forward losses cannot be used against profits).

A major change could include:

• A change in the type of goods, services, or facilities provided.

• A significant change in customers, markets, or outlets.

  
  

These changes might happen gradually, but once they reach a tipping point, the Corporate Losses Restriction would apply.

HMRC Guidance (SP 10/91)

Some changes are acceptable without triggering the rules, such as:

• Adopting new technology or management practices.

• Efficiency improvements (including redundancies).

• Dropping unprofitable product lines.

  
  

In short HMRC allows sensible commercial changes aimed at restoring profitability. But where changes transform the business into something unrecognisable, the Corporate Losses Restriction will apply.

Small or Negligible Trades

If a company’s trade is very small or dormant before a change in ownership, and then revived afterwards, losses from before the change cannot be used. This restriction has no time limit, and once blocked, those losses are lost forever.

Effect of the Rules

When restrictions apply, a "brick wall" is put up:

• Losses from before the ownership change cannot be set against later profits.

• Losses after the change cannot be carried back to earlier periods.

  
  

The blocks apply permanently for trading losses where there has been a major change in trade or revival of a negligible trade.

Post-April 2017 losses: Wider Business Changes

From April 2017, restrictions apply more widely where there is both:

• A change in ownership of the company, and

• A major change in the business, with both happening on or after 1 April 2017.

  
  

A major change can include:

• A significant shift in the nature, conduct, or scale of activities.

• Starting or ceasing a line of business.

  
  

Losses brought forward from before the ownership change cannot be used against profits linked to the changed business for five years. Unlike the older “major change in trade” rules (where losses are blocked permanently), this restriction is time-limited.

It applies not just to trading losses but also to property business losses, management expenses, non-trading deficits, and losses on intangible assets.

The review period depends on the type of loss:

• Trading losses: five years (starting up to three years before the change).

• Other losses: eight years (starting up to three years before the change).

  
  

Investment Businesses

Special restrictions apply to companies with investment businesses. Losses may be blocked if, after a change of ownership, there is either:

• A significant increase in capital within five years;

• A major change in the type of investments held (within an eight-year window); or

• The activities were small or negligible before the change and later revived.

  
  

A "significant increase in capital" typically means an increase of at least £1 million and at least 125% of the pre-change level.

Restricted amounts include management expenses, property business losses (UK and overseas), and non-trading deficits (loan relationships and IFAs).

Speak to an Expert

The rules on corporate losses and changes in ownership are complex and the consequences of getting it wrong can be costly. If you’re planning to buy or sell a company, restructure a business, or you’re unsure how these rules affect your ability to use losses, please feel free to get in touch.

Authored by: London Team