Tax relief for a loss on investment in an unquoted company
Question:
In June 2003 I invested around £25,000 in a UK limited company. It was run by me and my wife.
Unfortunately the company was wound up in September 2006 leaving me with a large capital loss. I had capital gains in 2004 and 2005. Would I be able to offset the capital loss against these. Alternatively is there any other loss offset possible eg against paye tax in the same year?
Answer:
The capital loss you've realised on the shares would not be able to be carried back to offset gains in prior tax years. Therefore you couldn't offset the loss against capital gains in 2004 or 2005.
In terms of offsetting the capital loss against income there are special rules contained in the tax legislation that allow individuals who have allowable losses on disposals of shares in unquoted companies to claim the losses against their income rather than against Capital gains.
Broadly speaking you would need to have subscribed for shares in a 'qualifying trading company'. Then on incurring an allowable loss on the disposal of the shares you would need to give written notice within twelve months from 31 January following that year, making a claim for relief from income tax on:
The definition of a 'qualifying trading company' can be complex however it is a company which is or would be a qualifying company for the purposes of the Enterprise Investment Scheme ('EIS'). Therefore the company that issued the shares would need to satisfy the EIS requirements eg relating to qualifying activities and gross assets.
Therefore in summary there are provisions that may allow you to offset the capital loss against other income in the tax year of the loss (and the preceding year), including employment income.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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