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The sale of company shares and other assets for more than their purchase price will generally give rise to a charge to capital gains tax. Conversely, the disposal of shares for less than their purchase price will result in a capital loss.
Such losses can be set against other gains arising in the same tax year or, if not used, carried forward indefinitely and set against future gains.
What about those situations where they have not sold the shares, but they have not merely diminished in value but become worthless? For example, shares acquired in a company that has subsequently entered into liquidation with no prospect of any return? On the one hand, there has been no disposal of the shares, on the other hand, the shareholder has lost value…
Fortunately, the tax legislation provides that when an individual owns an asset that has become worthless (or worth very little) it may be possible to make a “negligible value claim”.
If accepted by HMRC, such a claim deems the shares or other asset to have been disposed of and reacquired at their current value. If the shares are worth little or nothing, then its deemed disposal – though not actual disposal – effectively crystallise a capital loss which can, in turn, be set against other gains arising in the same or future tax years.
Subject to satisfying certain conditions, where the loss arises in respect of shares in unlisted trading companies, the it may be set against income.
Consequently, a negligible value claim, and where available, share loss relief, can provide a welcome means of accessing tax relief where an asset has become worthless.
The term ‘negligible’ is not defined in the tax legislation but HMRC take the view that it means worth next to nothing’
It is possible to check the valuation of the asset at the time of the disposal with HMRC via a “Post-Transaction Valuation Check”. This must be sought from HMRC before the individual’s tax return is submitted.
Given the time taken to obtain confirmation from HMRC, such checks must be submitted well-before the due date for the filing of the relevant self-assessment tax return.
If HMRC agree with the valuation, they will not be able to challenge this when the individual’s self-assessment tax return claiming the loss is submitted.
If the shares were previously quoted, the website of HMRC’s Shares and Assets Valuations team should be checked, as this lists companies that were formerly listed on the London Stock Exchange that had negligible claim values accepted. If the company in question is on this list, a formal claim must still be made by the individual.
The shares or assets must be held by the individual at the time of the claim. If the company has been dissolved or liquidated, the shares are no longer in existence and therefore it is no longer possible to make a negligible value claim. Timing is therefore crucial as if the individual is aware of the company’s future dissolution, the negligible value claim must be made ahead of the dissolution. Of course, if the company has been dissolved, this is treated as an actual disposal of the shares, and subject to satisfying the relevant time limits, a capital loss claim may be possible.
Once the value of the claim has been determined, the loss can be offset against any capital gains that the individual incurs in the current or future tax years. As explained below, it may also be possible to set the loss against income.
If the shares were held, and had become worthless, in the previous two tax years, then that earlier date can be specified in the negligible value claim.
Such a backdated claim may be worth considering if it can be proven that the shares were of negligible value at this point and the individual has capital gains arising in these periods. While each case should be considered in full, it is usually advisable that a loss is used at the earliest possible time.
Further consideration should be taken should the negligible value claim be in relation to Enterprise Investment Scheme (EIS) shares and similar qualifying shares in unlisted trading companies, as it may be possible to set the loss arising from a negligible value claim on such shares against income rather than just capital gains arising in either the year of the disposal or the prior tax year. As income is generally subject to higher rates of tax than capital gains, this can prove an especially valuable relief.
There are many rules that must be met in order for the company to be considered to be qualifying for these conditions, e.g. the company must not undertake an excluded trade and the shares must have been subscribed for by the individual making the claim.
Share loss relief is subject to the general income tax relief capping reliefs which allow a maximum of £50,000 or 25% of the adjusted total income of the loss to be used against the individual’s income during the tax year that the loss arose or the previous tax year. Note, however, that this restriction does not apply to losses arising on qualifying EIS or SEIS shares.
The claim is an ‘all or nothing’ claim meaning that claims cannot be restricted to preserve personal allowances.
An election claim must be made by the first anniversary following 31 January after the end of the tax year of the disposal, so if the disposal occurs during the 2017/18 tax year, the election must be made by 31 January 2020.
Any loss arising in excess of the maximum income tax relief, can be relieved against capital gains arising in the year of the loss or is carried forward against the individual’s future gains.
Where appropriate a negligible value should considered even before a company has gone into liquidation. If it is clear that a company is struggling, and liquidation is the likely outcome, then there may be a good argument that it is already of negligible value and a claim could be submitted.
Not only may a successful negligible value claim at an earlier point ensure that the taxpayer benefits from relief sooner, it can ensure that it is made in a year when the taxpayer has income against which to set the loss arising.
If you or your company hold an asset that has become worthless and would like further information regarding your eligibility to make a negligible claim value, please contact one of our tax advisers who will be able to assist. Alternatively read about some of HMRC’s recent NVC tax cases or check out more posts relating to CGT below.
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