Capital losses can be confusing, but they play a significant role in personal and corporate taxation. Understanding how these losses affect your tax situation can help you make informed investment decisions.  

In this article, we’ll explore what capital losses are, how they impact your taxes, and what special considerations you should keep in mind. 

What are capital losses? 

Capital losses occur when an individual sells an investment for less than its original purchase price. For instance, if someone buys stocks for £1,000 and later sells them for £700, they incur a capital loss of £300. These losses can arise from various assets, including stocks, bonds, and real estate. 

Capital losses must be used to offset capital gains in the same tax year automatically. For example, if a taxpayer realises a gain of £5,000 from one asset and a loss of £1,000 from another, the net capital gain for that year would be £4,000. The annual exempt amount is deducted after accounting for losses within the current year. 

While capital losses must be set against gains in the same tax year, taxpayers have flexibility in how they apply these losses to minimise their overall tax liability. If an individual has capital gains taxed at different rates such as higher rates for gains from residential properties, then losses should first be allocated against those higher-taxed gains. Hence, capital losses should be prioritised against gains from residential property before being applied to other gains not qualifying for entrepreneurs’ relief. 

If an individual’s capital losses exceed their capital gains in a given tax year, they can carry forward the remaining losses to future years. They can continue to use these losses to offset future gains, which can provide tax relief for years to come. 

Several factors can influence how capital losses impact your taxes. 

Negligible Value Claims

If an asset has become worthless, an individual can claim a Negligible Value Loss. This allows them to treat the asset as if it were sold for nothing, enabling them to offset other gains. 

Irrecoverable Loans

If the loan is made for trading purposes and becomes unrecoverable by the borrower, the lender may claim the losses to reduce their taxable gain for that year.  

Qualifying Trading Companies

Capital losses incurred on shares of qualifying trading companies, including EIS and SEIS shares, can be utilised either as capital losses or deducted from the net income of the current or preceding year. 

Bed and Breakfasting/30-Day Rule

The Capital Gains Tax rules also match a disposal of shares with any acquisition in the following 30 days. The most common bed and breakfast arrangement involves the sale and subsequent repurchase of shares. Due to share identification rules, the sale and repurchase must occur on different days. Therefore, even if a disposal takes place, repurchasing the shares on the same day would not result in any gain or loss. 

FAQs 

How do I report a capital loss to HMRC?

To report a capital loss, an individual will need to include it on their Self-Assessment tax return or the appropriate section of their company’s tax return. It is important for them to maintain accurate records of all transactions. 

How long can capital losses be carried forward?

Capital losses can be carried forward indefinitely until they are fully utilised against future capital gains. 

Can you offset capital losses against income tax?

Generally, capital losses can only offset capital gains, not income. However, certain losses may qualify for relief against income under specific rules. 

What happens if I have capital losses from a foreign investment?

Capital losses from foreign investments are generally treated in a manner similar to domestic losses. However, individuals should be aware of any tax treaties or specific regulations from other countries that may apply. 

How can Gerald Edelman help?

Understanding capital losses is crucial for effective tax planning, both for individuals and corporations. By leveraging capital losses to offset gains and carrying them forward to future years, individual can effectively manage their tax liabilities.  

If you need assistance claiming capital losses or have questions about the specific situation, we’re here to help. Reach out to us today to ensure you’re making the most of your investments and tax opportunities.