What’s Appropriate?

One of the tax changes which gained a nanosecond in the budget speech was the TCGA 92 s161(1) rule about appropriations to and from stock. Philip Hammond called this “converting capital losses into trading losses”. Why is this relevant or being tackled at this time?

As part of general anti-avoidance the option to convert losses on capital assets into a deduction against trading profits has been removed but what about the wider implications?

From April 2017 many property owners will be hit by changes to the way they receive tax relief on their rental properties and within 5 years higher rate taxpayers will see the tax relief they receive dropping from 40% or 45% tax relief to only the basic rate – 20%.

If the properties they own are in a largely rental property area the expected knock-on effect is that the property values will fall and landlords may then choose to dispose of these.

Say the landlord is also a property developer or in the building trade, the legislation could be used to take the reduced value properties from their letting portfolio into their trading company, moving a capital item (a property) to trading stock (a building to refurbish and sell on) and if that property has declined in value then the capital loss could be brought into the company and used against the profits of the trading company thus reducing the profits and the tax payable.

This option was closed down with effect from 8th March 2017.