Tax & Accounting News

Offsetting capital losses

12/05/2010

For anyone who invests in a small company which subsequently fails – for example a start-up business run by a family member or friend – the prospect of recovering the money involved may appear bleak, but there are some possible courses of action.

Normally, a loss made on the disposal of shares can be offset against current or future capital gains elsewhere, but if there are no chargeable gains to offset the loss against – for example if the business has failed completely – certain losses can be offset against income instead of capital. This would also bring a potential tax saving, since the Capital Gains Tax rate of 18 per cent is currently significantly lower than the higher rates of Income Tax.

However, in order to offset losses in this way, certain criteria must be fulfilled, namely that the individual concerned must have subscribed for the shares when they were issued and that the shares must be in an unquoted qualifying trading company. Certain trades are excluded, including property development, leasing, legal or accountancy services, farming, care homes and hotels.

It may also be possible to make a claim for a capital loss in the case of irrecoverable loans – normally defined as where the company owing the money has ceased to trade and does not have enough money to pay its creditors. If the borrower continues to trade, HMRC will need to see evidence that there is no prospect of recovering the debt in the future. This rule also does not apply to loans made to spouses or civil partners.

Similarly, anyone who has guaranteed a loan to such a company which has been called on, it is also possible to write off the loan as a capital loss.

For more information please contact us.

 

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