Enter Your E-mail

TaxationWeb by Jennifer Adams

Jennifer Adams outlines some options for obtaining tax relief potentially availiable to those with a capital loss.Timing is key when you buy and sell capital assets and although the property market in particular is showing hefty gains, gains may not be present if you purchased at the wrong time on the stock market. Every day investors are waking to news of Company Profit Warnings and reading business journalists views that the country is heading for recession. Therefore you may be looking at what to do with a capital loss rather than a capital gain, although it may be obvious to state that a loss only manifests itself when an asset is actually disposed of or becomes valueless.



The basics are easy - capital losses are computed in the same way as gains, namely, proceeds less base cost (cost or Market Value or value as at 31.3.82 whichever is the greater amount). If the result is a loss you can offset against any gains made but only against chargeable capital gains incurred in the same year. Current year losses must be set off as far as possible against current year gains arising before tapering relief is calculated. The loss can be restricted so preserving the ‘annual exempt amount’ and any balance of loss that remains unused is carried forward indefinitely (although the losses must be set off against future gains at the earliest opportunity.)



Although capital losses are segregated from income and offset is not allowed, interestingly enough, offset the other way round is possible. Sole traders and partnerships in business making a trading loss which cannot be utilised against other income of the year may claim to treat that loss as a CGT loss (up to the amount of gains chargeable to tax for that year before deducting indexation allowance and/ or tapering relief) (FA 1991, s. 72; TCGA 1992, s. 16(1)).

Strictly, a FA 1991 s72 claim cannot be made on its own – it should be made in the same notice as a claim under ICTA 1988 s380, as an extension to that loss and must also fulfill all the same conditions (a ICTA 1988 s380 claim is the offset of current year trading loss against other total income for the year of loss and/or the previous tax year). However, the Revenue have indicated that they are prepared to accept a separate claim where:

1. the trader has previously made a claim under ICTA 1988, s. 380 and could have claimed relief under FA 1991, s. 72 at the time but for some reason neglected to do so; and

2. a separate claim under FA 1991, s. 72 is actually made within the time-limits for the original claim under ICTA 1988, s. 380; and

3. after giving relief under ICTA 1988, s. 380, there is a balance of trading losses which have not otherwise been relieved; and

4. all the other conditions for relief are satisfied.

(Revenue Interpretation, Inland Revenue Tax Bulletin, Issue 8, August 1993)



In any event the claim must be made within 12 months of 31 January following the end of the tax year in which the loss arose (ie when the personal tax return is due to be delivered to the Revenue.). There is no statutory form for the loss claim – a short letter or a note shown under the “Additional information” boxes on the annual tax return form will suffice.



The mechanics of the claim are that a s380 claim against income of the year must be made first, in full, up to the amount of other income (unfortunately, in many instances this can result in the personal allowance being wasted.) The amount of the trading loss then remaining to be utilized against the capital gain is the lower of the “relevant amount” and the “maximum amount”. The “relevant amount” is the amount of trading loss that is left over after the s380 claim has been dealt with (possibly because there is not enough income to fully utilize the loss); the “maximum” amount is the amount of capital gains arising in the year less capital losses of the same year, less unrelieved capital losses brought forward. Once that lower amount has been calculated it is allowed in the computation before other capital losses brought forward or carried back and definitely before the annual exemption (which may, again, therefore be wasted).



Although the order of set-off in the chargeable gains calculation is not actually set out in TCGA 1982, from the above rules the implied order is:

1. Capital losses of the current year;

2. Trading losses under FA 1991, s. 72;

3. The annual exempt amount; then

4. Capital losses brought forward.



Tax planning with trading losses needs care as getting it wrong can (and often does) result in not only the loss of the annual personal allowance but also the loss of the use of the annual capital gains exemption which, as it currently stands at £8,200 is a valuable exemption to lose. A planning opportunity that should not be overlooked if faced with this particular problem of loss of allowances is to transfer sufficient assets to the other spouse, if married, so that two annual capital gains exemptions are available. In addition, you could specifically only transfer assets which you know will produce capital gains when sold, thereby ensuring that the gains arise in the name of the person who has trading losses available to relieve. Which assets to transfer have to be carefully chosen as losses arising to a person on a disposal between ‘connected persons’ can only be relieved against chargeable gains arising on another disposal to that same connected person (TCGA 1992, s. 18(3)).



As with any tax-planning exercise particularly when it involves a mixture of income and capital gains tax, considerations what may be beneficial on the one hand may not be good on the other but with a little planning great tax savings are always possible.



Jennifer Adams is TaxationWeb's Capital Taxes Editor. Click here for more information on Jennifer and her contact details.