Offset of tax loss on unquoted shares against previous capital gains or income?
In June 2002 I invested around £50,000 in a limited company. Me and my wife were the directors.
Due to poor trading it ceased to trade in September 2007 and I had a large capital loss. As I've no other taxable capital gains that I can offset this against I want to know what other options I have for getting tax relief on this.
I did make capital gains in 2006 but I presume the loss can't be offset against this?
Answer:
Yes, you are correct that the capital loss you've realised on the shares would not be able to be carried back to offset gains in prior tax years.
In terms of offsetting the capital loss against income this is not usually permitted, however there are special rules contained in the tax legislation that individuals who have allowable losses on disposals of shares in unquoted companies can 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:
In your case if the company has been wound up this would crystallise the loss. If not, you could make possibly a negligible value claim to state the value of the shares has now become negligible and crystallise the loss.
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 could allow you to offset the capital loss against other income in the tax year of the loss (and the preceding year), including employment income, rental income or other investment income.
If tax had been deducted at source (eg via PAYE) you'd then generate an income tax repayment.
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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