When a capital asset is disposed of (which includes sales, gifts, swaps or receipts of compensation), it may precipitate a capital gain or a capital loss. In the unfortunate event that you make a loss on the sale of your asset, you can generally offset the loss against any other gains you make in the same year or in the future. However, capital losses are not transferable and therefore cannot, for example, be transferred from one spouse or civil partner to the other – the capital gains of one spouse cannot be offset against the capital losses of the other.
Ordering of losses
A strict order applies for setting-off capital losses against capital gains. Firstly, losses arising in the tax year are offset against any other chargeable gains for the same year. You must deduct all your losses for the year, even if this results in chargeable gains after losses below the level of the capital gains tax (CGT) annual exempt amount. If the allowable losses arising in the tax year are greater than the total chargeable gains for the year, you can carry forward the excess losses to be deducted from chargeable gains in future years.
Reducing the chargeable gain
The next step is to look at any unused losses available from a previous tax year.
If chargeable gains remain after deducting the allowable losses arising in the year, any unused allowable losses brought forward from an earlier year may be deducted. However, you only need to deduct sufficient allowable losses brought forward to reduce the chargeable gains after losses to the level of the CGT annual exempt amount. Any remaining losses brought forward are carried forward again without limit, to be deducted from chargeable gains in future years.
Example – Losses brought forward
In 2014/15, Edward makes total chargeable gains of £15,000 and has allowable losses of £3,000. He also has unused allowable losses available from an earlier year of £8,000.
He deducts the current year losses first from his gains (£15,000 – £3,000), which leaves a chargeable gain of £12,000. Next, he deducts £1,000 of the losses brought forward, to take his chargeable gains down to £11,000 (the level of the CGT annual exemption for 2014/15). He can then carry forward the remaining unused losses of £7,000 (£8,000 – £1,000) to be used against chargeable gains arising in future years.
As his chargeable gains after losses don’t exceed the annual exempt amount for 2014/15, Edward does not have to pay any CGT.
Year of death
Capital losses cannot be carried back to earlier tax years, except with respect to unused capital losses arising in the year of death of the individual, which can be carried back for up to three tax years. The same approach as above is adopted with respect to the carry back of capital losses following death.
Negligible value claims
It is possible to claim losses on assets that you still own if they become worthless or of ‘negligible value’. Providing certain conditions are met, the asset is treated as though it was sold and immediately reacquired at the time the claim is made for an amount equal to its value. It is possible to specify an earlier date, falling in the two previous tax years, for the deemed disposal. A resulting loss arising from a negligible value claim can be used to reduce your income tax liability for the year, if the loss relates to qualifying shares where certain conditions are satisfied. Further information on negligible value claims is given the HMRC Helpsheet 286: “Negligible value claims and Income Tax losses on disposals of shares you have subscribed for in qualifying trading companies.”
Practical Tip:
The annual CGT exemption is a ‘use-it-or-lose-it’ allowance – if you don’t use it in one tax year, you can’t carry it forward to the next tax year. If you are thinking about selling, say, a bundle of shares, consider selling some shares at the end of one tax year and some at the beginning of the new tax year. In this way, you can use the capital gains annual exemptions for two years and (under current rates) could save up to £6,160.
