If you make a loss when selling an asset, you may be able to offset this loss against your capital gains to reduce your tax bill.  In this article we share some lesser-known contexts, which can also give rise to an allowable loss and consequent tax relief.

When do capital losses arise?

Capital losses can arise when you dispose of an asset for less than you paid for it, or if the asset is lost or destroyed, or if the asset loses most of its value.

When can you offset capital losses?

If you dispose of an asset to an unconnected party at arm’s length, you first set any resulting loss against capital gains of the same year. This offset cannot be restricted and may therefore result in you wasting part of your annual exemption. If losses remain after the offset against gains of the current year, you can carry the remainder forward to use against capital gains of later years. 

Below, we look at some types of capital loss which depart from this pattern. In some cases, a chargeable asset or an actual disposal is not required for an allowable loss to arise. Some capital losses are allowable against income, generally securing you a higher rate of relief. There are also some special cases where the capital loss can be carried back to prior years. 

Non-chargeable assets

You cannot claim a capital loss on the disposal of an asset that is exempt from Capital Gains Tax (CGT) - the prime example being a property that has always been your main residence. However, if the property has been your main residence for only part of the period of ownership (say 70%), 30% of the capital loss will be offsetable against your capital gains.

A gain accruing on the disposal of shares approved under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), which takes place more than three years after their issue, is not a chargeable gain, provided Income Tax relief was obtained and has not been withdrawn in the meantime.  However, the treatment is not symmetrical - if you realise a capital loss on the disposal of EIS or SEIS shares, you can offset it against your capital gains or possibly your income.

Negligible value claims 

If you own an asset which has become of negligible value, you can choose to make a Negligible Value Claim (NVC) and be treated as having disposed of the asset for tax purposes even though it remains in your ownership. You must still own the asset when the claim is made, possibly but not necessarily in your tax return.  

When making the NVC, you can choose to be treated as having made the disposal at an earlier time, provided you owned the asset and it already had attained negligible value at that point. You have two years from the end of the tax year in which you are choosing to have made the disposal to make the NVC.

Loans to traders

Another case where an allowable capital loss does not require a disposal is where you have made a loan to a trader and the loan has become irrecoverable. Provided the statutory conditions are met, the loss is allowable even though private debts are generally not chargeable assets for CGT. 

Qualifying trading companies

If you subscribe for shares in a ‘qualifying trading company’ and make a loss on the disposal of those shares, you can set that loss off against your income for the year of disposal or for the previous tax year. As the marginal rates of Income Tax are generally higher than the rates of CGT, relief for such losses tends to be more valuable than setting them off against capital gains.  

The definition of a ‘qualifying trading company’ is very detailed and we suggest that you take professional advice if you’re in any doubt as to whether you would qualify. 

Carrying back a capital loss

There are two cases in which you are allowed to carry back an unused capital loss to an earlier tax year. The first case concerns deferred unascertainable consideration for the sale of an asset (usually land or shares), which is only quantified on the occurrence of some future event, such as the grant of planning permission or achieving a performance target. This unascertainable consideration, known as an ‘earn-out’, must be valued at the time of the initial sale and this estimated value forms part of the disposal proceeds. 

If the condition for receiving the deferred consideration doesn’t happen or the performance target isn’t met, your earn-out can turn out to be worth less than its estimated value, resulting in a capital loss. You can then carry the loss back, but only against the capital gains realised in the year of the initial sale. 

The other type of capital loss that can be carried back is the surplus capital losses realised in the year of death. Your estate can carry the losses back to the three years preceding the year of death, with later years in priority to earlier years. 

Optimising relief

You can choose which gains should be reduced by the capital losses first, and so reduce your CGT liability as much as possible. However, following the 2024 Autumn Budget, special rates for residential property have been withdrawn, so the choice is now of reduced significance.

What should you do?

If you’ve incurred a financial capital loss other than on a straightforward sale, your first thought might be that it there is no tax relief is available. In fact, the scope of capital losses is much broader than is intuitively apparent and it’s always worth seeking specialist advice to determine if you’re eligible for relief.