Share loss relief is available both to individuals and to companies (although only investment companies are eligible to claim it). Provided certain conditions are met, the relief allows capital losses that arise in respect of shares to be set against a person’s income.
Without the provisions, allowable losses would only be relieved by setting them against chargeable gains on other assets. Relief against income may be more valuable to the investor than relief against capital gains, and the purpose of share loss relief is to encourage entrepreneurs to invest in unquoted trading companies.
How the relief works
In simple terms, the shares are treated as though they were sold and immediately reacquired at the time the claim is made for an amount equal to their value.
Example 1: Worthless shares become hard-earned cash
Some years ago, Edward subscribed for £10,000 of shares in a qualifying unquoted company.
Unfortunately, the shares have dropped in value and the company has now gone bust. HMRC have listed them as being of negligible value, which means that Edward can now claim share loss relief of £10,000.
He can offset this amount against his income for the tax year, and since he is a higher rate (40%) taxpayer, he can claim a reduction of £4,000 (£10,000 x 40%) against his total income tax liability for the year.
The main requirements to qualify for the relief are:
- The shares were acquired for money or money’s worth by subscription by the individual, or his spouse or civil partner who transferred them to him during their lifetime;
- The shares form part of the ‘ordinary share capital’ of the company;
- The investment is in a ‘qualifying trading company’ (see HMRC Helpsheet 286 for further details, but very broadly, this means unquoted, UK-resident companies); and
- The loss arises on a disposal by way of a bargain made at arm’s length, by way of a distribution in dissolving or winding up the company, or on establishing a claim that the shares are of negligible value.
The unquoted company needs only to be unquoted at the time that the shares were issued, provided that no arrangements existed for the company to cease to be unquoted at the time that the shares were issued.
Calculating the relief
If you claimed EIS income tax relief when you subscribed for the shares, the amount of income tax relief is deducted from the loss before share loss relief is given.
Example 2: Share loss relief on EIS shares
In 2003, Susan subscribed £10,000 for shares and claimed EIS income tax relief of £2,000 (£10,000 at 20%). In 2013, the company failed, and she made a negligible value claim.
Susan can claim loss relief of £8,000 (£10,000 less £2,000).
In other cases, the loss is calculated in the same way as other allowable capital losses. From 2013-14 onwards, the total amount of income tax relief that may be claimed is limited to £50,000, or 25% of the taxpayer’s income, if that is greater. This limit does not apply to losses on shares to which EIS or SEIS relief is attributable.
Only shares that you subscribed for qualify for relief. Relief cannot be claimed for shares that were gifted or inherited.
The relief has to be claimed within one year of 31 January following the year in which the loss was made. An allowable loss made in 2014–15, therefore, has to be claimed on or before 31 January 2017.
The relief is given by deducting the allowable loss from total income from all sources, before any deduction for personal income tax allowances. You cannot restrict the claim to leave your income equal to your personal income tax allowances, and this may result in a loss of personal tax allowance for the year of the claim.
For further details on claims, including a current list of HMRC-approved negligible value shares, see Helpsheet 286 on the government website (www.gov.uk).