“My individual client subscribed £300,000 for shares in an unquoted trading company in 2020. Unfortunately, the company has since become insolvent, meaning the client’s shares are now effectively worthless. The client can claim a capital loss without disposing of the shares and that this loss can potentially be set against his income, rather than his gains. However, his only income is from employment, amounting to £90,000 for the current tax year.”

It is possible to generate a loss for capital gains tax purposes in situations where the shares have not actually been disposed of. The mechanism for this is via a ‘negligible value claim’ and is made via TCGA 92 s.24(1A). Importantly the asset must have become of negligible value since it was acquired by the taxpayer, so it is important to establish that it had a non-negligible value when it was acquired; this appears to be the case for my client. It does not matter when the asset became of negligible value, only that it is of negligible value on the effective date of the claim.

 

There is no official definition of ‘negligible value’ for these purposes, but it can generally be taken to mean the asset is of no or almost no value, which would almost certainly include shares in an insolvent company.

Following the making of a negligible value claim, the asset is treated as having been disposed of for the specified amount, which can be nil, and then immediately reacquired for that same value. This effectively creates a loss while allowing the taxpayer to retain the asset. Note that this generally means there will not be any base cost available for later disposals, so if the asset for whatever reason increases in value the full proceeds will potentially then be subject to capital gains tax.

 

For a disposal of shares as with our client, HMRC may request proof that the shares were indeed of negligible value at the date of the claim, so it is important to hold evidence on file to support this. While it is not applicable in our client’s case, it is useful to note that HMRC maintain a list of ‘approved’ companies which were previously quoted on the London Stock Exchange and have become of negligible value. The list can be found here.

 

Having established and notified HMRC of the capital loss, we next need to consider how it can be used. If the shares were eligible for EIS or SEIS relief, or the company meets certain conditions as set out at ITA 07 s.134, the capital loss can be set against income of the year of the claim under s.131. Note that s.24A(6)(g) confirms that a £50,000 (or 25% of adjusted total income if higher) limit applies to a s.131 claim. This means that only £50,000 of the £90,000 of employment income for the year of the claim can be relieved, leaving £40,000 subject to tax.

 

However, the s.24A restrictions on the use of losses on a disposal or making of a negligible value claim in respect of shares only apply where the shares do not qualify for EIS/SEIS relief.

 

We and our client may wish to consider two further points relating to the above which could increase the income tax savings available. Firstly, TCGA 92 s.24(2)(b) allows the Negligible Value Claim to be made in one of the prior two tax years, provided the shares were also of negligible value at that point. Secondly, ITA 07 s.132 allows the income tax claim to be made in the prior tax year, instead of or in addition to the current tax year. Assuming the client had taxable income in the tax year of the claim and the prior year, this will potentially allow two sets of relief, of either an unlimited amount or up to £50,000 each (or 25% of adjusted total income if higher) depending on whether the shares are within EIS/SEIS, to be made.

 

Any amount of the loss which cannot be relieved via s.131 will remain a capital loss and be set first against any gains of the same year, before being carried forward against gains of later tax years.

To find out more about how this will affect your company and employees please contact your KKVMS advisor.