The following articles have been extracted under a licence from the R&C website:
Introduction
Assets and disposals
Working out the chargeable gain
Reliefs (other than taper relief)
Allowable losses
Taper relief: qualifying holding period
Taper relief: business assets and non-business assets
Working out the tapered chargeable gains
Working out the amount chargeable to CGT
Working out the tax due
Post transaction valuation checks for CGT
Indexation allowance
Taper relief on disposals of business assets on or before 5 April 2000
Introduction
This series of articles tell you the basic rules of Capital Gains Tax (CGT) for individuals.
This article addresses exactly how to work out allowable losses, when and how to claim back allowable losses and the time limits for doing so.
It covers only common situations and does not contain all the guidance you will need to work out your chargeable gain or allowable loss in every case, or how much CGT you will have to pay.
How do I work out my allowable losses?
You may have an allowable loss if:
- you dispose of an asset or receive a capital sum from your ownership of an asset and the allowable costs are greater than the disposal proceeds or capital sum, or
- an asset you own has become of negligible value and you make a claim to your Tax Office.
You work out an allowable loss in the same way that you work out a chargeable gain, except that you cannot use indexation allowance to create or increase an allowable loss. If indexation allowance would turn a gain into a loss, the result is capped at zero, that is, no gain or loss.
If an asset or disposal is of a kind that cannot give rise to a chargeable gain, then it cannot give rise to an allowable loss. Exceptions are losses arising on:
- shares in an Enterprise Investment Scheme (EIS) company, and
- certain loans to businesses.
If a loss could be taken into account when working out your income for income tax purposes, it is not an allowable loss for CGT purposes.
But you may claim to set certain trading losses against gains in the tax year of the loss, or the year before the loss, where you have insufficient income in those years to absorb the losses.
How are losses allowed?
Firstly, you deduct the allowable losses arising in the tax year from the total chargeable gains for the same year. You must deduct all the allowable losses for the year, even if this results in chargeable gains after losses below the level of the annual exempt amount.
If the allowable losses arising in the tax year are greater than the total chargeable gains for the year, you can carry forward the excess losses to be deducted from chargeable gains in future years.
If chargeable gains remain after you deduct the allowable losses arising in the year, you deduct unused allowable losses brought forward from an earlier year. You only deduct sufficient allowable losses brought forward to reduce the chargeable gains after losses to the level of the annual exempt amount. Any remaining losses brought forward are carried forward again to be deducted from chargeable gains in future years.
You deduct losses brought forward from 1996-1997 or a later tax year before losses brought forward from earlier years.
Example
In 2003-2004 you make total chargeable gains of £12,000 and allowable losses of £10,000.
You deduct all the allowable losses. There are no losses to be carried forward. As the remaining chargeable gains (£2,000) are below the annual exempt amount (£7,900) you will not have to pay any CGT. (There is no need for you to work out taper relief.)
Example
In 2003-2004 you make total chargeable gains of £12,000 and allowable losses of £15,000.
You deduct all the allowable losses. You can carry forward the excess losses of £3,000.
As there are no chargeable gains remaining, you will not have to pay any CGT.
Example
In 2003-2004 you make total chargeable gains of £12,000 and allowable losses of £3,000. There are also unused losses of £8,000 brought forward from 1996-1997.
You deduct all the allowable losses for the year. As chargeable gains of £9,000 remain, you deduct £1,100 of the losses brought forward to reduce the chargeable gains after losses to the level of the annual exempt amount (£7,900).
The remaining £6,900 losses brought forward are carried forward again. As the chargeable gains after losses do not exceed the annual exempt amount, you will not have to pay any CGT. (There is no need for you to work out taper relief.)
Can I deduct allowable losses after allowing taper relief?
No. Taper relief is given after all other reliefs and allowable losses. Losses are not tapered, so it is right to apply them to untapered chargeable gains.
Can I carry back allowable losses to deduct from gains in earlier years?
Allowable losses cannot normally be carried back.
There is an exception when someone dies his or her personal representative can carry back unused allowable losses arising in the tax year in which the person died and deduct them from total chargeable gains of the three preceding tax years. Losses carried back in this way are allowed in exactly the same way as losses carried forward from one year to another.
Some capital losses - arising on disposal on or after 10 April 2003 of rights to deferred unascertainable consideration - may, in certain circumstances, be carried back and set off against related gains of earlier tax years. If you think this might apply to your situation, ask your Tax Office for help. (An example of a right to deferred unascertainable consideration would be where part of the sale price of a business took the form of a right to payment of a percentage of the profits for the two years following the sale.)
Can I deduct allowable losses from any chargeable gains that I make?
If you have made an allowable loss on the disposal of an asset to a connected person (see Who are connected persons?), you may only deduct that loss from chargeable gains you make on disposals to the same person.
If you have an interest in a company and you have to pay CGT on gains that it makes (see What about gains made by trusts and companies in which I have an interest?) restrictions may apply.
If you are the beneficiary of a non-resident trust and have an amount attributed to you in respect of its gains when you receive a payment from the trust, then you may not set your personal losses against the attributed amount.
If you have an interest in a trust of which you were the settlor and have an amount attributed to you in respect of its gains, then you must first deduct your personal losses from your personal gains and then from the attributed amounts.
However, if you have an amount attributed to you after you have been temporarily non-resident, then in some cases you may not set your personal losses against the attributed amounts.
What happens if my asset is destroyed?
If you have an asset that is destroyed or ceases to exist, that usually constitutes a disposal for CGT purposes.
For example, if you have shares in a company that is dissolved and removed from, or struck off, the Register of Companies you dispose of the shares when this happens even if you still hold the share certificate.
That disposal usually gives rise to a loss, which may be an allowable loss.
What can I do if my asset becomes worthless?
If you own an asset that has become worthless you may make a claim to be treated as if you had sold and immediately re-acquired the asset for what it is worth. Such a claim is commonly called a negligible value claim.
That deemed disposal usually results in a loss. That loss may be an allowable loss.
There is no time limit for making a negligible value claim, but you can only make a claim before you dispose of the asset.
You will normally be treated as having sold the asset on the date you make the negligible value claim. However, you may specify in the claim that you wish to be treated as if you had sold the asset at a time during the previous two tax years. If you wish to specify a date before the date of claim, you must meet the conditions for making the claim both at that earlier date and at the date when the claim is made.
Can I set allowable losses against my income for income tax purposes?
With one exception, losses arising on the disposal of assets chargeable to CGT are only allowable against chargeable gains on such assets and cannot be deducted from income.
The exception is where the loss arises on shares you subscribed for as newly issued shares in an unlisted trading company. See Help Sheet IR286: Negligible value claims and Income Tax losses for shares you have subscribed for in unlisted trading companies.
Do I have to claim my losses?
Yes, if you have made a loss in 1996-1997 or a later tax year. Such a loss will not be an allowable loss unless you report it to your Tax Office. This is the case both for losses on a disposal to someone else and losses on a deemed disposal following a negligible value claim.
Article 1 An Introduction explains how to report losses to the Tax Office.
Is there a time limit for claiming my losses?
Yes. If you have made a loss in 1996-1997 or a later tax year you must report it to your Tax Office within five years and ten months of the end of the tax year in which the loss arose. This applies even if you are carrying the loss forward to be deducted from chargeable gains in future years.
There is no time limit within which losses brought forward must be used.
What do I do next?
You have now worked out your chargeable gains after losses.
If your chargeable gains after losses are equal to or less than the annual exempt amount, you have no CGT to pay and you do not need to work out taper relief (see Article 9 Working out the amount chargeable to CGT).
If the chargeable gains after losses are bigger than the annual exempt amount, you should go to the next section to see whether taper relief will reduce them.
| 
