If you have subscribed for new shares in a limited company, and either because you sold them at a loss, or if the shares have become worthless or of negligible value, then you can claim to turn that capital loss into an income tax loss. This article is all about making a negligible value claim for shares, but you can also use this tax relief on other assets. The point of all this is that most people have income that they pay tax on – and not many people make capital gains they pay tax on. So being able to set your loss against your income tax bill normally results in a tax refund. Whilst it’s not much fun to make a loss, getting a tax refund helps. Here’s our guide to turning a capital loss into an income tax loss.
There are some complexities to claiming this relief, and if you need help then please contact us [email protected]
What shares can I claim for?
This can apply to shares in quoted companies or private companies.
· HMRC maintain a list of quoted companies whose shares are deemed to be of negligible value, which can be found here: https://www.gov.uk/guidance/negligible-value-agreements
· Seed Enterprise Investment Scheme (SEIS) and Enterprise Investement Scheme (EIS) shares automatically qualify
· Shares in private limited companies normally qualify – the criteria to meet are shown next.
Because there is a deadline, one of the things to be careful of is when your shares become of negligible value.
Criteria
This is an official HMRC relief, and as you can expect, there are a variety of criteria to meet before your capital loss can be turned into an income tax loss.
1) The company must have been a trading company.
2) It must be a qualifying company.
3) You or your spouse must have acquired the shares by subscribing for them from the company.
4) The shares must not be fixed rate preference shares.
5) You must own the shares at the date they become of negligible value.
6) At the date of the claim the company must be in existence; ie have not been dissolved or struck off the register at Companies House.
7) Gross assets rule – if the shares were issued to you after 5 April 1998 there is a size rule. If the gross assets of the company were more than £7m at the date the shares were issued, then this needs to be checked to see if it stops you from claiming relief.
8) If the company has stopped trading then this must be no more than 3 years before the disposal; ie the negligible value claim.
Venture Capital relief
If the shares you held were subscribed for under the SEIS or EIS rules then they automatically qualify for income tax relief.
Deadlines
Important-there is a deadline for making claims. Any loss must be claimed within one year of 31 January after the year in which the loss arose. ie if you claim that your shares became of negligible value in the tax year ending 5th April 2021, then you have until 31 January 2023 in which to claim the relief. This date is the anniversary of the filing deadline for your 2021 tax return.
Another way to look at this is that, if you missed when it happened, that claims can be backdated by up to 2 years!
What if I invested in a company that has since been dissolved?
If the company you invested in has since been dissolved, are you able to backdate your claim (within the 2-year claim window) to a time when it was not dissolved? If not, then you have lost out.
How to make a claim
If you prepare a tax return, then you should add it there. You need to make an entry in box 43 of page CG2 of your 2021 tax return. This is one of the capital gain pages. The amount of the capital loss also goes into box 35 on page CG2 and you should give more details in the additional information box.
If you don’t normally prepare a tax return then you need to write to HMRC and make a standalone claim.
..of course, your accountant can deal with this for you. If you would like our help with turning capital loss into income tax loss, then please contact us.
