Using Capital Losses - Tax Insider

Sarah Laing looks at how the offsetting rules governing capital gains losses can be efficiently utilised to minimise capital gains tax.

The disposal of assets may precipitate both capital gains and capital losses. In principle, the rule is that capital losses can be offset against capital gains. However, capital losses are not transferable and therefore cannot, for example, be transferred from one spouse or civil partner to the other (and thus the capital gains of one spouse cannot be offset against the capital losses of the other).

Points to note

There are a few fundamental points to note with regards to how capital losses can be used:

The legislation specifies that capital losses that arise in a tax year must be offset against any capital gains for that tax year (TCGA 1992, s 2).
As a consequence, this may mean that an individual’s annual exempt amount for that tax year may be lost.
Capital losses of previous tax years which are unutilised may be carried forward indefinitely for offset against subsequent tax year capital gains (subject to possible limit).
Current tax year capital losses are offset before any capital losses brought forward from earlier tax years may be used.
Capital losses cannot be carried back to earlier tax years, except with respect to capital losses arising in the year of death of the individual.

Any capital losses carried forward can be offset against any net capital gains for the tax year concerned. However, any such losses brought forward may be offset against the net gains of the tax year only to the extent that they reduce the net gains to no less than the annual exempt amount for that tax year (thus preventing the loss of the annual exempt amount unnecessarily for that tax year).

Any remaining unused capital losses may then be carried forward to the next and succeeding tax years until fully utilised. The same approach is adopted with respect to the carry back of capital losses following death.

It should be noted that any unused part of the annual exempt amount is lost (i.e. it cannot be carried forward for future use, or back).

Example: Gains and losses

Henry has capital gains and losses as follows:

Year Gains Losses Annual exemption

2016/17 £30,000 Nil £11,100

2017/18 Nil £8,000 £11,300

2018/19 £35,000 £5,000 £11,700

2016/17

Gains chargeable to capital gains tax:

£30,000 less annual exemption £11,100 = £18,900

2017/18

Gains chargeable to capital gains tax = Nil

Losses carried forward to future years = £8,000

The annual exemption is lost.

2018/19

Gains chargeable to capital gains tax £35,000

Less: losses of same year (£5,000)

£30,000

Less: losses brought forward (£8,000)

£22,000

Less: annual exemption 2018/19 (£11,700)

Net chargeable gains £10,300

Now contrast this with William’s situation:

Year Gains Losses Annual exemption

2016/17 £24,000 £20,000 £11,100

2017/18 Nil £8,000 £11,300

2018/19 £20,000 £5,000 £11,700

2016/17

Gains chargeable to capital gains tax:

£24,000 less capital losses £20,000 = £4,000

Less annual exemption used to reduce gain to nil (£4,000)

Net chargeable gain = nil

The balance of the unused annual exemption for the year of £7,100 (£11,100 - £4,000) is lost.

2017/18

Gains chargeable to capital gains tax = Nil

Losses carried forward to future years = £8,000

The annual exemption is lost.

2018/19

Gains chargeable to capital gains tax £20,000

Less: losses of same year (£5,000)

£15,000

Less: losses brought forward (£3,300)*

£11,700

Less: annual exemption 2018/19 (£11,700)

Net chargeable gains nil

*The capital losses brought forward from 2017/18 of £8,000 are restricted in their offset to £3,300, so as to ensure none of the annual exempt amount of £11,700 is wasted. The unutilised £4,700 (i.e. £8,000 less £3,300) of the £8,000 of capital loss brought forward is eligible for carry forward to 2019/20 and future tax years.

Claims

A loss must be ‘claimed’ before it can be set against gains. The legislation stipulates that it will not be an allowable loss unless the taxpayer gives a notice to HMRC for the tax year in which the loss accrued. The notice must quantify the amount of the loss being claimed. For individuals, claims must generally be made no more than four years after the end of the tax year to which it relates.

Practical Tip:

An individual thinking of selling, say, a portfolio of shares, may wish to consider staging the sales over several tax years. In this way, it may be possible to fully utilise any capital losses without wasting the annual exemption.