In a tax year, you may make a profit on your asset on which you must pay capital gains tax. In certain situations, you may end up making a loss on your asset. If that happens, then the rules are different and more complex. So, what do you do with this loss? This guide will cover everything you need to know about reporting, claiming, offsetting, and carrying forward losses.
First, let us discuss the definition of capital gains tax. Then, we can move on to whether you can offset capital losses against income UK.
What is Capital Gains Tax?
A tax charge that applies to the gain you make from selling your asset is called Capital Gains Tax (CGT). The calculation of CGT takes places on the profit you make. Which is the increase in the value of the sale price compared to the purchase price. This applies to assets that you hold for more than one year.
Usually, CGT applies to the following:
- Investment funds.
- Sale of a business.
- Second homes.
- Valuables, including jewellery, art, and antiques.
- Inherited properties.
- Assets that you transfer at below their market value.
These assets are currently subject to capital gains tax at rates that differ from income tax rates. This is because investing in such assets is viewed as a risk, whether it be investment-related or entrepreneurial, and so, the potential payoff for taking on further risk is higher.
How Does CGT Work in the UK?
There is no automatic deduction by HMRC in the case of CGT, unlike income tax. This means that you must report it. Since various fiscal triggers exist, you should know what requires reporting. If you fail to provide accurate reports to HMRC, you will end up facing a fine that is more than your tax bill. Therefore, notifying HMRC is crucial. It is important to know how to reduce your CGT:
|Type of Asset
|Basic Rate Taxpayer
|Higher/Additional Rate Taxpayer
|Shares (not held within an ISA or PEP)
What is Capital Gains Tax Allowance?
You do not need to worry when doing your tax return as you have a capital gains tax allowance.
Now, how much is this allowance? Well, for individuals it is £6,000 in the 2023/2024 tax year. Whereas for trusts it is £3,000. This means that you can make a profit of up to £6,000 before CGT begins to apply. A reduction is going to place in April 2024 as it will go down from £6,000 to £3,000 for individuals.
For those who have joint ownership of a taxable asset, the allowance is double the amount. Which means up to £12,000 of gains is exempt from CGT. An example of joint ownership of a taxable asset is a second home.
If you transfer assets to your partner and make a gain afterwards, the rules change. The CGT that you owe depends on the total time of your ownership of the assets together instead of the date of transference.
When you sell your primary residence, you do not need to pay CGT. However, it applies when you sell your second home. Also, it applies when you let out your primary residence or use it for business purposes. Depending on your tax bracket, the CGT rate is 18% or 28%.
When it comes to stock and shares, the CGT rate depends on your tax bracket as well. The rates are different in this case. They are 10% or 20%.
What is a Capital Loss?
If your organisation or company disposes of or sells a capital asset, it can risk facing a capital loss. In case they sell it at a price that is less than it was worth, then they will not make a profit and suffer a loss instead.
Capital losses differ from trading losses. Therefore, their treatment is also different. You cannot offset them against trading income. However, when it comes to allowable capital allowances, they are set off automatically.
What Happens If You Make a Capital Loss?
Suppose you dispose of an asset. You do so to an unconnected third party and the transaction takes place at arm’s length. Then, even if your annual exemption covers your gains, you need to set any loss against any other gains in the same tax year. As a result, you may end up wasting your annual exempt amount. So, can you offset capital losses against income tax UK?
After all this, if your losses remain, then you need to inform HMRC. This way, you can use these losses later by carrying them forward. Please note that you cannot carry losses back. There is an exception to this rule. If a taxpayer disposes of an asset in the part of a tax year prior to passing away, then it is possible. For more information, check out HMRC’s Capital Gains Manual CG30430.
If an asset is exempt from capital gains tax, you cannot claim a loss made on it.
Please take note that you are likely to not recover all your losses if you give away an asset or sell it for less than market value to a linked party, like a close relative (further information on gifts may be found on our page on gifts), or to an unrelated person other than through an arm’s length transaction. You can more details in HMRC’s Capital Gains Manual CG14561.
How to Carry Forward a Capital Loss
You can claim capital losses through your Self-Assessment tax return. Although you may not wish to file a return in case you make a loss, you should consider it. You can claim it back later, as in next year. It is vital to comprehend the process of capital loss carry forward.
Furthermore, when you claim a loss, you can only do so against profit made of the same kind. For example, if you sell a property for loss then you cannot claim this loss against profit from trading Bitcoins.
How Long Can Capital Losses Be Carried Forward?
You cannot offset capital losses against income UK. However, you can offset them against capital gains in the same year. You need to report your capital losses to HMRC. To carry them forward, you must submit a claim to HMRC within four years of the end of the tax year in which you made the loss. You can carry forward any unused losses indefinitely and offset them against any future gains. If you do not submit a claim within four years, it will be time-barred.
Suppose you made losses in 2018/19. Then, you should have claimed them by 5 April 2023.
Is it Possible to Claim Losses for Assets that are Destroyed or Lost?
In case you lose a capital asset, or it gets destroyed, you should treat it as a disposal.
Moreover, if you get compensation for it, then you consider the amount you receive as the sales proceeds. Whereas your sales proceeds are effectively nil if you do not get any compensation for the loss of your asset. As a result, you can claim relief for the loss.
What Should You Do if Your Shares Lose Most or All of Their Value?
If the company in which you have shares goes into receivership or liquidation, then your shares can loss their value. They may loss all their value or most of it.
Now, what can you do if the shares you own are now worthless or close to worthless? Well, in this case, you can make a ‘negligible value claim’.
Negligible Value Claim
Suppose you meet all the conditions and make a negligible value claim. Then, it is as if you sold those shares and bought them back at whatever their value was. Therefore, you create a loss. This takes place if you do so on the earliest of the following dates:
- the date that the claim is received by HMRC; and
- a date that you designate on the claim; if the shares were nearly or completely worthless at that point, which is in one of the two prior tax years. This enables you to recognize the loss as occurring in a separate tax year. If you have significant gains in one of the two years, this is crucial as it may serve to reduce your potential capital gains tax liability.
Then, you figure out your capital loss. It is necessary to calculate it as though you sold the shares for their negligible value on that relevant date.
You can find the list of companies whose shares HMRC deems worthless as they publish it.
Please note that you need to write to HMRC to claim capital losses if you do not typically complete a tax return. Otherwise, you will lose them. Please note that in this situation you have four years to do so. These four years start from the end of the tax year in which you made the losses and wanted to claim them. For example, you made a loss in the tax year which ended on 5 April 2023. Then, your deadline for claiming capital losses is 5 April 2027.
How to Deduct Losses from your CGT Bill
Each tax year, CGT applies to your capital gains. Suppose you sold an item and made a profit on it. However, you made a loss by selling another item. In this case, before you figure out how much tax you owe, you can deduct the loss from the gain. Now, you know the answer to the question: can you offset capital losses against income tax UK?
Please note that if you have any unused allowances, you cannot carry them forward. Whereas you can forward losses that you did not use to offset gains.
It is crucial to submit details of your losses in your tax return. It does not matter if you do not owe any CGT. By doing so, it becomes easier to offset the losses against any potential gain in the upcoming years.
To summarise, when you make a capital loss on an asset, it is vital that your report that loss to HMRC. You cannot offset capital losses against income UK. However, you can offset the loss against a gain. It is important to understand that there is deadline in which you can claim these losses. You should do so within four years of the end of the tax year in which you made the loss. If you do not use your losses, then you can carry them forward to the next year.