The end of the tax year is approaching. A reduction to the capital gains tax annual exempt amount is imminent. This may be a good time for taxpayers to take stock of available capital losses, and ensure they have been claimed, says Mei Lim Cooper.
Gains realised within a tax year are broadly subject to capital gains tax (CGT), depending on the availability of reliefs and exemptions. The amount of those gains that is taxable is reduced by capital losses realised during the same tax year, losses carried forward from previous tax years and by the annual exempt amount (AEA). As announced in the Autumn Statement 2022, the AEA will reduce to £6,000 for the 2023/24 tax year, and will halve again to £3,000 for the 2024/25 tax year onwards.
With a far less generous AEA on offer in future tax years, an increasing number of taxpayers may find their gains subject to CGT unless they have losses available to offset them. Those dusty disposals that didn’t make it onto a tax return, the negligible value investments lurking deep in the portfolio – shining a light on these may unlock valuable loss relief.
Such losses, though, must be claimed within the correct time limits in order to have effect.
First and foremost, a capital loss on a disposal or deemed disposal has to be claimed to be allowable. This must be done within four tax years of the end of the tax year in which the capital loss arose. So, capital losses arising in the 2018/19 tax year must be claimed by 5 April 2023 if the taxpayer wants to use them.
Capital loss claims may be made via a tax return (as is probably the case for most individuals with losses) or amended tax return if within the amendment window. Otherwise, a standalone written claim can be submitted to HMRC. The amount of the loss must be quantified in the claim.
When validly claimed, capital gains of a certain tax year are automatically offset against capital losses realised in the same tax year, with no restriction to preserve full use of the AEA, if applicable. Taxpayers can, however, offset the loss against whichever in-year gains they choose, meaning that losses can be set against gains subject to higher CGT rates in priority to those taxed at lower rates.
Once current year gains have been completely extinguished, any excess losses are carried forward to be offset against gains in future tax years. Brought forward gains must be offset when gains are available, but the offset is restricted to ensure that year’s AEA is not wasted.
While it may make little difference to those with frequent transactions, some taxpayers may find that accelerating or delaying the crystallisation of a capital loss so that it lies in a different tax year may allow that loss to be used in a more beneficial way.
It should be kept in mind, too, that capital losses on disposals to connected persons are ‘clogged’. They can only be offset against a gain on disposal to the same connected person.
There may also be more beneficial uses for losses than offsetting against gains. Losses arising from qualifying enterprise investment scheme and seed enterprise investment scheme investments (once reduced for income tax relief already claimed) may be set against income from the current or previous tax year. Share loss relief against income also applies for disposals of shares in certain unquoted companies. A claim is required to do this.
Negligible value claims
Where a taxpayer holds an investment that has ‘become worth next to nothing’, in HMRC’s words, it may be possible to make a negligible value claim (NVC). Such a claim allows the asset to be treated as having been disposed of and immediately reacquired by the taxpayer for the amount quantified in the claim.
The disposal date is typically the same as the date of the NVC. However, a taxpayer can specify for the disposal to have taken place at any time in the two tax years preceding the NVC, provided that the asset was both owned and of negligible value at the date specified.
While the NVC provides a lot of flexibility over the timing of a claim, there are some nuanced conditions and procedures to be mindful of. For instance, the asset must still be held at the time a NVC is made. Once an entity is dissolved, the ability to make a NVC falls away and a capital loss arises.
Moreover, for a claim to have effect, HMRC will need to agree that the investment is of negligible value. For quoted investments, HMRC publishes a list of securities that it accepts as being of negligible value (up to date to 31 January 2023). For unquoted investments, though, taxpayers may need to provide evidence showing that the investment has lost its value, or for larger loss claims the market value must be agreed by the Shares and Assets Valuation (SAV) team. This can involve lengthy discussions with HMRC and SAV, which may delay the use of losses. Form 34 can also be used to ask HMRC to agree a value for a NVC.
For losses arising under a NVC on some unquoted trading companies, the capital loss can be offset against income under share loss relief, as mentioned above.
In the above situations the disposal (either actual or deemed) is apparent. However, in some cases it is less clear that a disposal has occurred. Take, for instance, the receipt of money or an asset in relation to an investment that has been damaged or impaired. Sometimes such compensation is received without requiring the disposal of that investment.
Such compensation is treated as the receipt of a ‘capital sum derived from an asset’ and, subject to the facts, a part-disposal of the underlying asset may arise. Computing the gain or loss on the part-disposal would require a valuation of the underlying asset and the compensation at the point it is received.
Where this gives rise to a loss, again this loss would need to be claimed within the normal time limits for a capital loss claim. Of course, the specific facts of a transaction may lead to a different outcome, but it is worth checking.
Foreign loss issues
When an individual is tax resident in the UK, typically their worldwide gains are subject to UK CGT. They are therefore able to use their worldwide losses to offset against such gains. However, foreign disposals must be recomputed according to UK CGT principles. Depending on currency movements, this may result in an unexpected gain or loss in sterling, despite the opposite being realised in the country of disposal.
Careful consideration of the double tax agreement may be needed to ensure the correct amount of tax relief or credit is claimed in either country. Tax paid on a gain in one country does not necessarily mean that the same tax is creditable, or even deductible, in another.
Occasionally there may be a mismatch between the treatment in the UK and other jurisdictions, particularly where hybrid entities are involved. Though a loss may arise under the tax rules of another country, the UK rules could mean that such a loss is not recognised for UK CGT purposes. It may be that additional action or reporting is required for a loss to crystallise from a UK CGT perspective, and the timing of this event would dictate in which UK tax year a loss arises.
Residence and remittance basis
Special rules apply to UK resident remittance basis users who wish to use foreign losses and an irrevocable election is required to allow them to do so. This area is complex and should be carefully considered according to each taxpayer’s individual circumstances.
Additionally, remittance basis users do not benefit from an AEA to reduce gains that are taxable in the UK. Rebasing to 5 April 2017 may be available for deemed domiciled taxpayers who have previously claimed the remittance basis.
It is a widely known planning point that capital gains realised when an individual is not UK tax resident are not typically subject to CGT (except for on disposals of UK land and property, or if they are temporarily non-resident). Correspondingly, it should therefore not be forgotten that most losses realised when non-UK resident are not allowable losses for CGT purposes. If a taxpayer is changing their tax residence status, timing may be of the essence.
While there are innumerable other situations that may give rise to capital losses, one string that ties them all together is the advantage of thorough and contemporaneous record-keeping.
With the rise of digital records, this is becoming ever easier. However, many will still rely on paper certificates, letters from companies detailing their dissolution dates and handwritten notes of their share pool calculations. In the face of an HMRC challenge over the quantum or validity of a loss claim, a well-kept record of supporting evidence is invaluable. Where there is flexibility over the timing of a gain or loss, such records could also help identify offset opportunities around the year end.
While statutory requirements set out that records should be kept until at least 31 January following the end of the sixth tax year, recent cases such as Goksu v HMRC  UKFTT 213 (TC) demonstrate the practical need to keep records stretching back far further than this.
Many taxpayers will look at their capital gains position only after the April tax year end, when gathering information for the preparation of their tax return. However, taking a proactive approach in advance of 5 April may uncover potential value and highlight any impending deadlines for making claims.
Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW