A loss-making company is in the process of introducing new shareholders as part of a turnaround plan. The shareholders wish to start afresh and transfer the trade to a new company. Can the historic trading losses be transferred along with the trade?



The existing company, which is owned by three shareholders in the proportions 60:20:20, has been struggling for many years and has accumulated trade losses of £3 million. The losses have been funded in part by the majority shareholder lending significant sums to the company, with the balance of their loan account now standing at £1 million.

In an effort to turn the business around, the company hired two experienced managers last year and the fruits of their labour are just starting to show. The company is on course to turn a profit this year and the owners wish to reward the new employees by making them shareholders. They will each have 20% of the shares and the majority shareholder will drop to 20% so that all five shareholders are equal.

However, it has been agreed that with the business turning a corner and the new shareholders coming onboard, the new era of the business should start over in a new company. The trade will therefore be transferred to a new company (Newco), but they are unsure whether the losses can be transferred also.


Company losses - recap

When a single trading company makes a loss, there are three ways in which it can obtain relief for those losses:

  • Set against total profits of the current accounting period.
  • Carry back and set against total profits of the preceding accounting period.
  • Carry forward and set against profits of future accounting periods.

Following a relaxation of the rules in Finance Act 2017 , losses incurred in an accounting period commencing on or after 1 April 2017 can now be carried forward and set against total profits of the company. Previously, the offset was restricted to trading profits only.

Where the trade and assets of a company are transferred to another company, any brought forward losses will remain with the company and will not be transferred over with the trade, unless the succession conditions in Ch.1, Pt. 22 Corporation Tax Act 2010 (CTA)  are satisfied.

If the conditions are not satisfied, the company would be advised to use the losses as far as possible via a terminal loss claim on the cessation of the trade, with any unused losses being wasted.



If the conditions are met, the transfer is a succession, and is referred to in the legislation as a “transfer of trade without a change of ownership”. The cessation of trade rules are modified so that no terminal loss claim is made and instead the losses are transferred across to Newco.

To be a succession, two conditions must be met.

The tax condition. Both the existing company and Newco must be within charge to UK corporation tax.

The ownership condition. The transferred trade must be owned as to at least 75% by the same persons, both at some point in the year before the transfer and at some point in the two years after the transfer.

Even if the succession rules apply, the amount of losses transferred will be restricted under s. 945 CTA 2010 if the company retains more liabilities than assets. Assets for this purpose includes the consideration received for the trade from Newco, although liabilities assumed by Newco will not count as consideration.

Example. Newco pays the company £300,000 consideration for the transfer of the trade and assets, but debtors of £200,000 and the directors’ loan creditor of £1 million are excluded from the transfer. The company is therefore left insolvent by £500,000 and so these net liabilities restrict the losses transferred to £2.5m.


Minimum period

The current proposal that the two new employees become shareholders in Newco from incorporation will mean there will be a change in the ownership of the trade, and therefore the losses will remain with the original company. This is because the common group of shareholders for Newco and the original company will be the original three shareholders. As they will only hold 60% of the shares in Newco, the 75% common ownership test discussed above will not be met. This strategy will clearly not work.

Ownership condition. The shareholders have asked whether it is possible to set Newco up with just the original three shareholders so that the 75% test is met, and then issue shares to the two new employees after the transfer. The ownership condition does not stipulate a minimum time period for the 75% common ownership to be held, just that it must be held “at some point” in the two years post or one year previous. HMRC acknowledges this at CTM06210.  

A potential problem is that if the two new shareholders do not pay full market value for their shares, the majority shareholder of the existing could be deemed to have made a CGT disposal under the value shifting rules in s.29 Taxation of Chargeable Gains Act 1992 (TCGA), if value flows out of their shares and into the new employees’ shares. If this were to happen, holdover relief under s.165 should be available. As an alternative a share scheme, such as a growth share plan, could be used.

Whilst there is no prescribed time limit, Newco would need to actually begin to conduct the trade before the new shareholders were admitted, and the trade would need to have substance so that Newco would be considered to own it.

In the case of Barkers of Malton Ltd v HMRC (2008) Sp C 689, the loss-making trade and assets were hived down to a newly formed subsidiary and then the subsidiary was immediately sold to the buyer. HMRC successfully argued that the subsidiary never began to trade before it was sold, and so never met the ownership test. The losses were unable to be used by the purchasing company.


Loss buying

It should therefore be possible to set up Newco with the original three shareholders and add in the two employees later. However, as an alternative to transferring the trade to the existing, Newco could acquire the existing company itself and acquire the losses as well.

It is likely that in practice, the acquisition of the existing company would be structured as as a share for share exchange, and it would be advisable to obtain clearance from HMRC first.



Following the Court of Appeal decision in Leekes v HMRC [2018] EWCA Civ 1185, where a loss-making company is acquired and then the trade is hived up to the acquiring company, any pre-April 2017 losses are only available against the trade profits of that same trade and cannot be set against the wider trading profits of the acquirer.

Even though post-April 2017 trade losses can now be carried forward and used against total profits, s.676EB CTA 2010 provides a restriction where loss-making companies are bought and the trade transferred to the acquirer. For the five years following acquisition, post-April 2017 losses can only be used against profits of the purchaser that are attributed to the transferred trade.

There can also be a restriction where there has been a purchase of a loss-making company following by a major change in the nature or conduct of the company. Neither restriction should affect Newco though, as it will only be conducting one trade which has not changed in nature.