The ‘Basics’ of Share Loss Relief you Must Be Kidding!

The ‘Basics’ of Share Loss Relief? you Must Be Kidding!

Share loss relief (SLR) applies to ‘qualifying shares’; shares to which income tax relief under the enterprise investment scheme (EIS) is ‘attributable’ are automatically qualifying shares. Otherwise, the shares must be in a ‘qualifying trading company’ for which a specific regime of requirements applies for this purpose.

 

Restriction for Income Tax Relief

Income tax relief obtained (and not withdrawn) under either the EIS or seed enterprise investment scheme (SEIS) must be deducted from the amount qualifying for relief (under ITA 2007, s 131), as shown by the following simple example:

 

Example: Restricted Loss Relief

Audrey subscribed £200,000 for EIS shares on 1 May 2021 and obtained income tax relief at 30% of £60,000. The company was not successful, and she sold the shares for £50,000 on 1 June 2024. Her claim for loss relief under ITA 2007, s 131 is restricted as follows:

 

                                                                                       £                          £

Sale proceeds                                                                                       50,000

Allowable expenditure                                         200,000

Less income tax relief                                         (60,000)

(140,000)

Allowable loss                                                                                   (90,000)

* If the shares had been sold before the threeyear ‘termination date’ of 1 May 2024, the income tax relief obtained would have been partially withdrawn.

 

Claim for Relief

Audrey may claim relief for the loss in calculating her taxable income for the year of the loss (2024/25), for the previous tax year (2023/24), or for both years. If for both years, Audrey must specify the year for which a deduction is to be made first. Any remaining balance continues to be allowable as a CGT loss.

 

CGT Disposal: Negligible Value Claim

In the example, Audrey sold her shares, which was therefore a disposal for CGT purposes. However, it will frequently happen that the company will be a lost cause and may be liquidated or dissolved and the shares will simply cease to exist.

The provisions dealing with disposals where assets are lost or destroyed, or become of negligible value (TCGA 1992, s 24) will automatically trigger a CGT disposal in those circumstances, or the taxpayer may make a claim that the shares have become of negligible value.

Broadly, a negligible value claim creates a capital loss arising on the date of the claim (which must be made while the asset still exists). However, the claim may specify an earlier time during the previous two tax years when the asset in question had become of negligible value. The asset is then regarded as having been sold and immediately reacquired (for all CGT purposes) at that earlier time, thereby crystallising a capital loss for that tax year.

Implications for ITA 2007, s 131 This could have implications, of course, for claims for relief under ITA 2007 s 131, which has its own provisions for relief for the year of the loss or the previous year.

In the above example, potentially if Audrey’s capital loss had arisen as a result of a negligible value claim, she could have specified a date in 2023/24 or 2022/23 provided that the shares had then become of negligible value. The time limit for a claim under section 131, however, is the first anniversary of the filing date for the year of the loss. For 2023/24, the deadline is therefore 31 January 2026, but section 131 would allow her to claim for either 2022/23 and/or 2023/24 (as explained). So that makes three years including 2024/25, potentially, within range of section 131.

 

Practical Tip

A CGT loss must have arisen for a section 131 claim to be made, so unless there is an actual disposal and the shares have become of negligible value while the company has not yet been dissolved, a negligible value claim must be made to trigger a loss. A section 131 claim on its own will not succeed.

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