James Bailey looks at how an asset that once had value becomes of ‘negligible value’ - and the impact of this treatment for capital gains tax purposes.
In some cases, it is possible to realise a loss on an asset for capital gains tax (CGT) purposes without actually disposing of the asset concerned. This occurs when the asset is lost, destroyed, or becomes ‘of negligible value’.
If you own a ‘chargeable asset’ (that is one on which you would pay CGT if you sold it at a profit) and you can show that the asset has become of ‘negligible value’, you can make a claim to be treated as if you had sold the asset and bought it back for its market value, thus realising a loss for CGT purposes which can be set against gains in the same tax year or in later tax years.
What does ‘negligible value’ mean?
HMRC interpret ‘negligible value’ to mean ‘next to nothing’. You cannot make a claim simply because an asset is worth much less than it used to be – it must be virtually worthless.
A claim for negligible value may be made retrospectively for up to two years from the beginning of the tax year in which the claim is made (or two years from the beginning of the accounting period in the case of companies), provided you can show that you owned the asset at that time and that it was of negligible value then.
If you have claimed a loss as a result of an asset being of negligible value and you subsequently actually dispose of the asset and receive something for it, the whole of what you receive will be chargeable to CGT, because having claimed negligible value your CGT base cost has become nil.
Problem areas
HMRC take quite a hard line as to what constitutes ‘negligible value’. For example, one result of the reform of the Common Agricultural Policy is that Milk Quota will cease to exist on 31 March 2015. HMRC have, however, let it be known that they will look very closely at claims that Milk Quota has become of negligible value before that date. They argue that though each individual unit of Quota may be of negligible value already, there is still a market for it and the relevant value is the value of all the units of quota owned by the farmer concerned.
There can be similar problems arguing that the goodwill of a business has become of negligible value. Unless the business has actually ceased trading, or is hopelessly insolvent, HMRC are likely to challenge any argument that the business goodwill is of negligible value.
In many partnership agreements there is a clause saying that retiring partners will not be paid for any goodwill, and new partners do not have to buy goodwill. This is not enough to establish negligible value, however, because if the whole partnership were to be sold, the purchase price would presumably include goodwill.
Company shares
One of the commonest assets to become of negligible value is a shareholding in a limited company. Many companies become dormant after they cease to trade, and may exist in a kind of limbo whereby they are still there but have no assets; or a company may be in the (sometimes lengthy) process of liquidation with no assets likely to be available to distribute to the shareholders after the creditors have been paid off.
HMRC will accept negligible value claims for shares in these circumstances – they publish regular lists of companies they agree are of negligible value on their website.
Practical Tip:
If you own shares in a failed company, or any other asset that has become worthless, consider making a negligible value claim to crystallise the loss for CGT purposes and use it against other capital gains in the same or a future tax year. Remember that ‘negligible value’ means ‘worth next to nothing’ as far as HMRC are concerned.
