Use of capital losses

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Use of capital losses
  • General rules
  • All capital losses must be claimed
  • Capital losses must first be set off against capital gains in the same tax year
  • After reducing the current year gains to nil, the excess is carried forward to set against gains in future tax years
  • Allowable capital losses can be carried back on the taxpayer’s death
  • Losses carried back on death
  • Restrictions on the use of losses
  • Losses arising as a result of tax avoidance
  • Losses on disposals to connected persons
  • More...

Use of capital losses

If an individual sells a chargeable asset and makes an allowable loss, how can this be relieved?

First of all, since the simplification of capital gains tax from 6 April 2008, the proforma to calculate a loss is the same as the proforma to calculate a gain. See the Basic calculation principles of capital gains tax guidance note for more details. Broadly, a loss arises if net proceeds after incidental costs of sale are less than the total of the acquisition costs plus any allowable enhancement expenditure.

Usually, allowable capital losses are set against chargeable gains, reducing the amount of the gain.

However, where a loss has been made on unquoted shares, the loss may be able to be set against income instead of gains. This is usually a more tax efficient use of the loss, as income is taxed at higher rates than capital gains. See the Losses on shares set against income guidance note for details of the conditions which must be met.

Also, certain unused trading, post-cessation trading or employment income tax losses can be converted into capital losses in order to be set against the individual’s capital gains. The converted loss is regarded as a capital loss for the same tax year as the income tax loss arose, and takes priority over capital losses brought forward from earlier years. For details of the conditions that must be met and the amount of the loss that can be converted, see the Sole trader losses ― established trades and Post-cessation receipts and expenses of a trade guidance notes and Simon’s Taxes E4.789A.

In setting off capital losses, the following general rules apply (discussed in detail below):

  1. all capital losses must be claimed

  2. capital losses must first be set off against capital gains in the same tax year (deducted in the most tax efficient way)

  3. after reducing the current year gains to nil, the excess is carried forward to set against gains in

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