Sarah Bradford explains how the Capital Gains Tax legislation provides tax relief for assets that have become worthless - and may even provide Income Tax relief in some cases.
Negligible Value Claim
The relief, known as a negligible value claim, is available for assets that have been or have become of negligible value. For these purposes, an asset is regarded as being of negligible value if it is worth next to nothing.
Essentially, relief is given by allowing a taxpayer to make a claim to be treated as if he or she had disposed of the asset and immediately reacquired it, at the time that claim is made, (or in some cases before), for a value as specified in the claim. This will be its negligible value, generally nil or a very small amount. The effect of this is to allow the taxpayer to realise a capital loss in respect of the asset without actually having to dispose of it.
To be eligible to make a claim, the taxpayer must still own the asset and the asset must have become of negligible value during the taxpayer’s period of ownership.
The effective date of the disposal must be specified in the claim and can be in the tax year in which the claim was made, or in any of the two preceding tax years. Where the claim is made for the disposal to be in an earlier tax year, the taxpayer must have both owned the asset at that earlier time and the asset must have been of negligible value at the time of the deemed disposal.
Making the Claim
The claim can be made either in the Self-Assessment tax return or on Form CG34, which is available to download from the HMRC website (see Form CG34 - Application for Post Valuation Transaction Check). Alternatively, a claim can be made by writing to HMRC. If a claim is to be made for an earlier tax year, this can also be done by amending the tax return for that year.
Shares - 'Converting' a Capital Loss into an Income Tax Loss
Where a loss arises as a result of a negligible value claim in respect of shares in a qualifying trading company, provided that certain conditions are met a claim can be made to set the loss against income. This will allow the loss to be relieved where there are insufficient gains to absorb it and can give relief earlier than might otherwise be possible.
Example
Polly subscribed for shares in a small business in 2006. The business failed in November 2009 and the shares became worthless. Polly makes a negligible value claim in 2009/10 and the resulting loss of £500 can be set against either her chargeable gains in the normal way or against her income for 2009/10 or 2008/09.
The relief against income is only available if certain conditions are met. These relate to the type of company, the type of shares and the period of time for which the company has been a trading company.
Practical Tip
HMRC has published a Tax Return Help Sheet on negligible value claims (Help Sheet 286). This sets out the rules governing negligible value claims, the procedures for making a claim and the special conditions that apply in relating to negligible value claims in respect of shares in trading companies. The Help Sheet is available to download from HMRC’s website at HS286 - Negligible Value Claims and Income Tax Losses on Disposals of Shares that you have Subscribed for in Qualifying Trading Companies
[ See also Mark McLaughlin's article - Loans and Capital Losses - for related information - Ed. ]
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