ACCA Advanced Taxation (ATX) Practice Exam

What happens to a capital loss incurred before joining a capital gains group?

1. It can be offset against any gains realized after joining

2. It can only be offset against gains from assets owned before joining

3. It can be used freely within the group

4. It is lost and cannot be carried forward

The correct answer is: It can only be offset against gains from assets owned before joining

When a company incurs a capital loss before joining a capital gains group, the treatment of that loss is specifically governed by tax regulations regarding group relief and capital gains. In this context, the correct choice highlights that capital losses can only be utilized against capital gains derived from assets that the company owned before entering the group. This is essential because, generally, losses must be matched to gains from the same ownership period. Therefore, if an asset was sold after the group formation and that asset was not owned prior to joining the group, then the capital loss incurred previously would not be eligible to offset those gains. The approach underlines the importance of specific ownership periods for tax calculations, ensuring that losses are matched to the appropriate gains responsible for their creation. This limitation helps maintain the integrity of tax avoidance regulations by preventing the manipulation of losses against unrelated future gains after a restructuring or joining of group companies.