Losses on shares set against income

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Losses on shares set against income
  • Conditions
  • Identifying the shares sold
  • Quantifying and claiming income tax relief
  • Avoiding a trap

Usually, allowable capital losses can only be set against chargeable gains. If the losses are not fully utilised against gains in the year in which they arise, the excess is carried forward to use against future gains. See the Use of capital losses guidance note (subscription sensitive) for further details.

This rule can be broken if the loss arises on certain shares. If the shares meet certain conditions, the taxpayer can choose whether to set the losses against:

  • his chargeable gains, or
  • his income for:
    • that year
    • the previous year, or
    • both years

Given the lower rates of capital gains tax compared with the rates of income tax, it is more tax effective to set the losses against income if possible. Losses on any shares not meeting the conditions are treated as capital losses under the normal rules.

This is a common mechanism of obtaining relief for losses on enterprise investment scheme (EIS) shares. See the EIS and VCT shares guidance note (subscription sensitive) for more details on the capital gains tax treatment of these shares.

See Tolley’s Capital Gains Tax 2018/19 Chapter 44.15 (subscription sensitive).

Please note that losses on shares set against income are included in the cap on unlimited income tax reliefs (see below).

Note that in July 2018, the European Commission formally gave notice  to the UK Government that the losses on shares set against income rules breach the EU principle of free movement of capital. This is because the relief is only available on shares in non-EIS companies where the company carries on its business wholly or mainly in the UK. Therefore, it may be possible for individuals with losses on shares in such non-UK companies to claim loss relief. For a

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