Many years ago you sold some shares for considerably less than you paid for them. You’ve never had cause to claim the capital gains tax loss. Is it too late to do so?
Eternal losses
Capital losses are unique in tax as they go on and on forever. To put it another way, capital losses are never lost. For example, if you made a loss in 2001/2 and don’t make a gain until, say, 2020/21 you can use it to reduce the tax payable on the gain. What’s more, the loss can be used against any gain; a loss made from share trading can be used against a gain made from selling a property and vice versa.
Trap. While generally any loss can be set against any gain, anti-avoidance rules limit the use of certain types of loss to similar gains, e.g. where the loss arises from a transaction with someone you’re connected with, e.g. your son.
Creating losses
Capital losses can only be carried forward where they exceed all your gains of the same year. Say you made a capital gain of £19,000 in 2020/21 and in the same year made losses from other transactions of £12,000. The losses must first be used to reduce the gain to £7,000, which is then covered by your annual capital gains tax exemption of £12,300 – you can’t use the exemption against the gain first so as to create a loss to carry forward.
Tip. Plan your losses if possible. Where you make gains that will be covered by your annual exemption, creating a loss will not improve your tax position. Therefore, if you can, defer a loss-making transaction to a year in which you don’t expect to have gains. That way the loss will be available to carry forward indefinitely to use against future gains.
Time limits under self-assessment
While capital losses last forever, you first have to register them with HMRC within four years of the end of the tax year in which the loss arose. So if you made an overall loss in 2020/21 your claim must reach HMRC, on your self-assessment tax return or in a letter, by no later than 5 April 2025.
Tip. A different time limit applies during an enquiry or where HMRC issues a discovery assessment, i.e. where it thinks you have under declared your taxable liability. The deadline for claims in these situations is usually one year from the end of the tax year in which the assessment was issued or the enquiry closed.
Time limits pre self-assessment
The timing of capital loss claims was a contentious issue for a while following the introduction of self-assessment in April 1996. At first HMRC tried to impose a rule which said you must include details of capital losses brought forward from before self-assessment on your returns or they wouldn’t be allowed. However, it now accepts that a claim for pre self-assessment capital losses does not need to be made or quantified until you use all or part of the loss against a gain.
Tip. If you realise that you’ve overlooked capital losses from before 6 April 1996, you can still claim them. To make sure you don’t overlook them again include them in the additional information section of your next self-assessment return.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.