In an ideal world the value of an asset will increase during the period of ownership such that, when you come to sell it there will be a nice little profit (after capital gains tax) with which you can invest in another asset, pay for a nice holiday, or hoard in your vaults to bathe in at your leisure (think Scrooge McDuck).
However, some assets will fall in value during the ownership period and the sale of said asset will result in a capital loss (the shrewd amongst us may note that is this likely to be why cars are exempt from CGT).
Occasionally though, the asset become worthless, whilst ownership is retained – this can be due to destruction or damage, or because the asset is shares in a loss-making company.
Where an asset is damaged, and the individual makes a claim for compensation they are treated as disposing of the asset for the consideration received. Relief is available to the extent that the funds are used to restore or repair the asset, any excess would remain chargeable.
If no consideration is received, the individual can make a negligible value claim. The term ‘negligible’ is not defined by legislation so it would take its ordinary meaning, and HMRC take the view that it means ‘worth next to nothing’. It is possible to seek confirmation from HMRC’s Valuations Office or to check their website if the asset is listed shares. Valuations should be obtained prior to the submission of your tax return.
If the negligible value claim is accepted by HMRC, the individual would be treated as disposing of, and immediately reacquiring the asset for its value at the date of the claim (thus reducing the base cost for any potential subsequent disposal). The effect is to create a capital loss in the year of the claim.
Capital losses are automatically set against capital gains arising in the same year, any excess losses are carried forward. Capital losses cannot be carried back. However, it is possible to backdate the negligible value claim providing it does not relate to a time earlier than two years prior to the tax year in which the claim is made.
A backdated claim may be worth considering if it can be proven that the shares were of negligible value at that time and the individual had capital gains arising in those earlier periods. Generally, it is advisable to use a loss as early as possible, however, each case could be reviewed on its own merits.
In order for a negligible value claim to be valid the individual must still own the asset at the time of the claim and at the time it became of negligible value. The claim must be made by the first anniversary of the 31 January following the tax year to which it relates.
A further relief is available which allows the individual to set losses on qualifying shares against income. The shares must either be Enterprise Investment Scheme (EIS) shares or be unlisted shares in a trading company and the shares must have been subscribed for by the individual. As income is generally subject to higher rates of tax than gains this can be more a more beneficial claim. However, as stated above each case is different and should be reviewed on its own merits.
The timing of any such claim is important, particularly in relation to shares.