The Budget: Loophole closed on capital gains loss: Capital Gains Tax

UP TO pounds 600m of tax losses accumulated in Canary Wharf, the failed Docklands development, will not be able to be used following the closing of a tax loophole.

The change means that companies which buy firms with capital gains tax losses will not be able to use those losses to set against the tax profits from the sale of companies or assets within the parent company, or against profits made on assets bought into the group if they are in a different area from the company with the tax losses. The change is immediate and affects any company bought since 31 March 1987.

Hanson was among the companies that expressed interest in buying Canary Wharf when it went into administration last year, and Hanson's interest was assumed to be for tax savings.

One of the reasons given for not putting the pounds 1.4bn development into liquidation was that the tax losses would be lost.

Three other corporation tax loopholes were tightened in the Budget. The change that will affect most companies was an extension of the rule that profits that a UK company takes from a foreign firm in which it has a stake of more than 10 per cent will be taxed at the UK rate if the foreign tax rate is lower.

Previously this only applied when the tax rate in the foreign country was less than half the UK rate, but this has now been changed to when the foreign rate is up to 75 per cent of the UK rate.

Coopers & Lybrand, the accounting firm, reckons that a large number of UK companies will be caught by this change.

The Inland Revenue expects to raise an extra pounds 50m from the change.

Companies that buy firms which have paid tax in previous years, which could have been set against the parent company's advance corporation tax liability, will not be able to marry the tax paid and the ACT liability.

Companies that have overseas operations which pay interest on loans from the UK company will not be able to avoid paying tax on the interest simply because the subsidiary has yet physically to pay over the interest. Previously companies would accrue interest in the subsidiary, set it off against tax in the foreign country and then not remit the interest, to avoid tax in the UK.