Background
Negligible value claims can be a valuable relief which is often easy to overlook. Taxpayers who own assets that have become worthless can make a negligible value claim to reduce their tax liability.
Shares are a good example of assets which can easily become worthless, if companies become insolvent. HM Revenue & Customs (‘HMRC’) have an ‘approved list’ of shares which were previously quoted on the London Stock Exchange and have been declared to be of negligible value. Claims can also be made for unlisted shares which have become of negligible value, and shareholders in such companies should consider making a claim on their tax return.
Detail
When a taxpayer owns an asset which has become of negligible value, they can claim a capital loss without actually disposing of the asset. The claim is made by treating the asset as if it had been sold for its current market value, which is usually zero, and immediately reacquired for the same negligible value. This effectively creates the loss while allowing the taxpayer to retain the asset. It should be noted that this generally means there will not be any base cost available should it be disposed of in the future for a higher amount. So if the asset increases in value the full proceeds will potentially then be subject to capital gains tax.
Importantly, the asset must have become of negligible value after it was acquired by the taxpayer.
It does not matter when the asset became of negligible value, only that it is of negligible value at the date of the claim and before it has been disposed of. HMRC may request proof that an asset has become of negligible value at the date of the claim so it is important that evidence to support this is obtained.
There is no official definition of ‘negligible value’ for these purposes, but it can generally be taken to mean the asset is of no, or almost no value, and so would almost certainly include shares in an insolvent company.
Having established and notified HMRC of the capital loss, one thing to consider is how the loss can be used. Making a claim for negligible value relief will give rise to a capital loss for that asset which can then be set against other capital gains arising in the same tax year, and any surplus loss can be carried forward against any future capital gains that may arise.
If the shares were eligible for enterprise investment scheme (EIS) or SEIS relief, or the company meets certain criteria, the capital loss whether as a result of a normal disposal or as a result of a negligible value claim can be set against other income of the year of the claim, or the previous year. It should be noted that when setting a capital loss against income there is limit of £50,000 or 25% of adjusted total income, if higher, which can be claimed. However, the restrictions on the use of losses only apply where the shares do not qualify for EIS/SEIS relief.
It is possible for a negligible value claim to be made in one of the previous two tax years, provided the shares were also of negligible value at that point.
Any amount of the loss that cannot be relieved against income remains as a capital loss to be set first against any gains of the same year, before being carried forward against gains of later tax years.
Whilst this relief is likely to mainly be of benefit to individuals, the legislation does allow for companies to also make negligible value claims on chargeable assets.
If you have assets which you consider may be or likely to become of negligible value, and would like any advice or assistance in making a negligible value claim, or alternatively would like to discuss any of the issues above then please contact our Tax Director, Jenny Marks.
To see our other news items please visit our Muras Baker Jones – Blog.