Lee Sharpe looks at the options available to the individual when they make a loss on an investment.
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This article considers how an individual taxpayer may claim losses if an investment fails. Please note that we are covering only capital gains tax (CGT), etc., for individuals; the rules for companies are quite different.
Capital assets
Firstly, we are considering investments, so capital assets, subject to CGT. There is a symmetrical rule here (except where the legislation specifically provides otherwise); losses are allowable only to the extent that a gain would be taxable. For many, the most likely scenario would be on the disposal of a property that qualified as one’s only or main home – sometimes referred to as principal private residence (PPR) relief – if, say, you had made a gain on the disposal and some or all of that theoretical gain would not be taxable under the PPR relief rules, then a corresponding proportion of any actual loss will not be allowable.
Capital losses must also be claimed in time. This seems obvious, but I am old enough to remember a time (before self-assessment was introduced) when capital losses could accrue over many years and be wheeled out only when actually used, to set against a capital gain. Now, however, they must generally be claimed within four years of their arising, or risk being forfeit entirely. While there is no particular format for the claim, the usual approach is to include the disposal in the capital gains section of one’s tax return, then to claim relief (the flexibility in format helps those who do not make tax returns).
Capital losses arising in the tax year must also be set against gains arising in that tax year. Any residual losses are then carried forward to set against the gains made by that person in a later year (capital losses cannot normally be carried back, except on death).
This is often far from ideal:
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Most people make CGT-able disposals only rarely, if ever. It can be several years before a CGT loss can be utilised. The taxpayer must claim their losses in time, then keep them on record.
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Given that CGT is basically now taxable at only 24% maximum, one might have preferred to claim a loss against income tax, where rates of 40% or 45% are not uncommon. Fortunately, it is possible, in some carefully defined circumstances, to transform a qualifying CGT loss into a claim against income.
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Even the losses themselves may sometimes be difficult to ‘realise’. The usual trigger for CGT is a disposal but not all blighted assets can easily be sold – a house that has repeatedly been damaged by flood might basically be unsellable. Likewise, private company shares can be difficult to sell at the best of times, but this can be much worse if the company is in serious trouble.
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Briefly, beware losses on disposals to connected parties. These are often referred to as ‘clogged losses’; they can normally be set only against gains made on disposals to the same party.
However, we shall look at two easements in the legislation.
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Negligible value claims - this is where the investor claims that the asset has become of negligible value – worthless, broadly speaking. While the legislation is designed to help where assets are unsellable, one does not have to prove that the asset cannot be sold, but only that the asset is carrying practically no value at the time of the claim. At first glance, this might be problematic for landlords, given that the ‘real’ asset in terms of land and buildings is (almost) always the land, not the building adorning it. But the GGT legislation allows an owner to treat the building as a distinct asset, so capable of triggering a loss separately from the land.
On the making of a claim, the owner is treated as having sold it for whatever residual value remains (thereby precipitating a capital loss) and then having immediately reacquired it at that low value. Thus, the asset still exists, and if it is sold later, then the new CGT base cost is that negligible value – it balances out, mathematically.
Two key conditions are that the asset must have become of negligible value while owned by the claimant (it must have had real value at some stage, usually when first acquired), and that it must still exist. The claim can even be backdated by up to two years, providing that the owner can prove that the asset already had negligible value at that earlier time (and that they owned it). In fact, aside from proving that the asset is basically worthless at the date of claim, there is no need to identify precisely when something became of negligible value – there is no deadline, as such. Notably, HMRC says that the asset must still exist at the date of the claim (as well as the date on which it became worthless, if backdated). There may be a practical constraint here, typically seen with shares; if a company has dissolved and the shares no longer exist, then a ‘real’ disposal (destruction of the asset) has overtaken the chance to make a negligible value claim, and real disposals have real time limits.
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Income tax losses on shares in unlisted trading companies – a person may ‘convert’ a CGT loss into a potentially much more useful income tax loss, but only on a further claim, and where the loss is on shares acquired by subscription in qualifying ‘small’ trading companies. The loss could have arisen on an actual disposal of the shares, or dissolution, or by way of a qualifying negligible value claim.
Unsurprisingly, there are numerous conditions to making such a potentially valuable claim that, over the years, have borrowed heavily from the rules governing tax-favoured investments in the enterprise investment scheme (EIS). So much so, in fact, that I have heard some advisers say that “they must be EIS shares”, which is not accurate. But the criteria are narrow, all the same. The rules for losses on EIS investments themselves are complex and are not considered further here.
Loans and deposits
While the rules for loans from companies are quite different, the rules for personal tax still support a claim for a CGT loss on a loan to a trading entity (for trading purposes) that has become partly or wholly irrecoverable. This is similar to a negligible value claim as above, except that the loan does not have to be wholly or largely worthless at the date of claim; a claim may be made to the extent that the principal of a loan (as distinct from any interest thereon) has become irrecoverable.
Deposits are dealt with separately in the CGT legislation. HMRC has robustly defended that there is no relief for a lost deposit on securing a property; but note that Lloyd-Webber v HMRC [2019] UKFTT 717 (TC) was decided in favour of the taxpayer (although the later case of Drake v HMRC [2022] UKFTT 25 (TC) is more in line with HMRC’s thinking - note that in Lloyd-Webber, the developer baulked, while in Drake, the investor allowed his deposit to lapse).
Contrasting cases
Some of these nuances were considered recently in HMRC v Bunting [2025] UKUT 96 (TCC). The taxpayer had lent money to his own trading company and, in 2013, when the debt seemed likely irrecoverable, exchanged the loan for new shares apparently in the hope of making an income tax loss claim on those shares, as above, and broadly in line with Fletcher v HMRC [2008] SpC 711.
Eventually, the taxpayer accepted that the new shares did not “become worthless while owned” but had already been worthless immediately on exchange (unlike with the successful Fletcher case), so he then (in 2016) tried to make a CGT claim for the original irrecoverable loan to a trader (his company). While initially successful at the First-tier Tribunal, HMRC won on appeal at the Upper Tribunal on the basis that, at the much later date of his irrecoverable loan claim, the loan no longer existed.
Conclusion
There are numerous opportunities to claim relief when an investment goes bad, and there is some flexibility, but the rules are not as simple as might first appear.
The legislation for negligible value claims and for loans to traders is very similar. I think it is finely balanced, but I am not convinced it supports HMRC’s long-standing argument that the legislation has always required a loan still to exist at the point of actually making the claim, as well as up to two years beforehand (although there have been a number of small tweaks to the wording over the last several years). The Upper Tribunal did say in Bunting that, if only the irrecoverable loan claim had been made before being exchanged for fresh shares, it might very well have succeeded. Cold comfort for the taxpayer in that case, but instructive to the rest of us; assets or loans that have fallen in value must be carefully monitored; also, it may be wise to make any negligible claim and claim any loss, sooner rather than later.
