This guest blog post is provided courtesy of tax expert Rebecca Benneyworth and SimpleTax who provide simple to use self assessment tax return filing software.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. Seedrs does not provide legal, financial or tax advice of any kind, and nothing in this blog post constitutes such advice. If you have any questions with respect to legal, financial or tax matters relevant to your interactions with Seedrs or its affiliates, you should consult a professional adviser.
Relief for investment losses
Where an investment has unfortunately not been successful, there are various ways in which you could claim tax relief for that loss. The exact method of relief and amount of relief available depends on the nature of the investment, and whether the original investment attracted any tax relief at the time it was made. So let’s first go through an introduction to the calculation and reporting of losses.
Calculating how much loss you may have
The loss is calculated under the capital gains tax rules. This means that the cost of the investment is deducted from any proceeds on the disposal of it. Often, when an investment has been unsuccessful, the shares are not sold, but the company enters insolvent liquidation. In this case, the distribution by the liquidator (frequently zero) is technically the date of disposal, but it is possible to make an earlier claim to establish the loss by making a “negligible value claim”. This means that the investment now has no value, and HMRC would accept a claim under loss relief if the company is insolvent.
Where the investment is a loan, again a negligible value claim could be made to indicate that there is no chance of the loan being repaid. In both cases, evidence should be retained so that if the claim is challenged by HMRC you can produce some official documentation to support your claim that the company has wound up and that you are eligible to claim loss relief on your tax return.
Where tax relief was granted on the purchase of the investment, the relief given is deducted from the original cost of the investment, reducing the amount of total material loss. You may need to check back to the purchase to determine how much tax relief you obtained.
Losses must be “established” in order for loss relief to be claimed – even if relief is not available and the loss is carried forward, so you will need to complete the capital gains tax pages of a tax return in the year in which the loss arises.
Tax relief for the loss
As in these circumstances the loss is a capital loss, loss, the claim is usually granted against any capital gains arising in the year, or carried forward against future capital gains – meaning any capital gains you were due to receive will have this relief factored into them instead of the relief being factored into your income tax. However, in some circumstances the loss may be set against income – providing a much more worthwhile relief, as the taxpayer may have no capital gains in the year, or may have gains which are covered by his annual exempt amount.
Circumstances where the loss may be set against the total income of the year in which the loss is incurred and the preceding year are:
- The loss is on shares for which income tax relief under EIS was given, or
- The loss is on shares which were subscribed for (not purchased from another shareholder) in a qualifying trading company (this relief will normally apply to SEIS investments).
There is a cap on the amount of losses which can be offset in any year, but at least £50,000 of loss relief is available to claimants in each year if they have sufficient income to cover it.
Administration for claims
Claims for losses and for relief for those losses must be made through the tax return and the time limit is the next 31 January one year after the end of the tax year of the loss. This is 12 months after the deadline for submitting the tax return for that year.
You can learn more about loss relief and Capital Gains Tax under SEIS/EIS from HMRC here.
