Weekly tax brief

Making the best of a bad situation: tax relief on capital losses

18 March 2020

Between 17 February and 16 March 2020, the FTSE 100 Index fell by 2,282 points, or 31%, leaving many investors with significant losses in their portfolios. The position for unquoted investments is difficult to estimate but is likely to be even more pronounced in some cases. Sadly, at the time of writing it looks inevitable that some businesses will not survive the impact of coronavirus and the measures being taken to fight it.

Given all of this, is there anything you can do to soften the blow caused by the losses being suffered?

The first point worth making is that the dramatic drops in the stock market do not mean that you have made losses for tax purposes. Tax losses only arise when you actually sell your shares, and investors who chose to ride out the crisis may well find that over the medium term they have not actually lost value at all.

If you do dispose of an asset, the capital loss will generally be calculated as the price paid less the disposal proceeds. This loss is initially set against capital gains of the same year, before deducting the annual exempt amount of £12,000. As a result, if you make gains and losses in the same tax year you may lose relief. If possible, it’s worth seeing if you can make disposals that generate a net gain of close to £12,000 to get the most from your allowances.  

Unused capital losses can be carried forward to reduce gains of later years. Brought-forward losses are only used after your annual exemption, which stops them from being wasted.

If an unquoted trading company has lost all its value, the shareholder can make a negligible value claim to HMRC. The effect of a successful claim is to treat the shares as if they were sold for nothing, crystallising a capital loss equal to the base cost of the shares.

Usually, capital losses can only be set off against capital gains. However, capital losses suffered on an unquoted trading business can be offset against income, potentially saving tax at 45%. 

You can 'bed and breakfast' shares by selling them and buying them back later. This allows you to realise a loss now but continue to hold the shares long term. Be careful though – if you buy shares back within 30 days, special rules apply to limit the relief you can claim. On the other hand, 'bed and spousing', where you sell the shares and your husband or wife immediately buys them back, lets you realise your loss with a minimal period of non-ownership.

Making use of tax losses is not going to be high on anyone’s agenda now, but if you can, think about what you can do. Tax reliefs can’t wholly compensate for real losses suffered, but they can help to soften the blow, if you act quickly.