Policy paper

Share loss relief for Income Tax and Corporation Tax

Published 11 July 2019

Who is likely to be affected

Individuals and investment companies who subscribe for newly issued shares in small and medium unlisted trading companies, where the shares are subsequently disposed of for a loss.

General description of the measure

This measure widens the scope of the Income Tax and Corporation Tax share loss relief, so that it applies to shares in companies carrying on a business anywhere in the world and not just the UK. A change will be made to the reporting requirements so that HMRC can identify the tax residency of the company that issued the shares.

Policy objective

This measure is designed to benefit individuals and investment companies, by widening the scope of share loss relief so that it also applies to newly issued shares in small and medium unlisted trading companies carrying on their business outside the UK, and the shares are subsequently disposed of by the shareholder for a loss.

Background to the measure

The European Commission issued a reasoned opinion on 24 January 2019. Changes are being made to provide that share loss relief applies to investments in companies resident outside the UK to ensure that this relief is compatible with the principle of free movement of capital.

On 23 June 2016, the EU referendum took place and the people of the UK voted to leave the EU. Until exit day, the UK remains a full member of the EU and all the rights and obligations of EU membership remain in force.

During this period the government will continue to negotiate, implement and apply EU legislation.

Detailed proposal

Operative date

This measure will have effect from 24 January 2019.

Current law

Income Tax share loss relief can be found at section 131 Income Tax Act 2007 onwards. It applies where an individual subscribes for newly issued shares in a small and medium unlisted trading company, and then disposes of those shares for a loss.

Corporation Tax share loss relief can be found at section 68 Corporation Tax Act 2010 onwards. It applies where an investment company subscribes and broadly mirrors the requirements found in the Income Tax Act 2007.

To qualify for the relief the shares issued must be qualifying shares, being either:

• shares to which Enterprise Investment Scheme (EIS) relief is attributable (this applies for individuals only)
• shares in a qualifying trading company

A company will be a qualifying trading company if it meets 4 conditions at the relevant time. The relevant time varies depending on the condition. At a basic level a company will be a trading company if:

• it carried on a trading activity which was not an excluded activity, for which there is an exhaustive list of activities
• its gross assets did not exceed a limit immediately before and immediately after the subscription
• it was unlisted
• it carried on its business wholly or mainly in the UK

Relief is only due if the holder of the shares made a disposal of them which resulted in an allowable loss for the purposes of the Taxation of Chargeable Gains Act 1992. Relief was given for that allowable loss against income rather than against capital gains as would normally be the case.

Proposed revisions

Legislation will be introduced extending the relief so that it applies to shares in companies that are located anywhere in the world. An additional reporting requirement will be introduced for the claimant to tell HMRC the tax residency of the company that issued the shares.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023

The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Budget 2019.

Economic impact

This measure is not expected to have any significant macro-economic impacts.

Impact on individuals, households and families

This measure will only impact on a small number of individuals who currently subscribe for newly issued shares in companies carrying on a business outside the UK. This measure will benefit those individuals, by widening the scope of share loss relief so that it applies to losses on shares in companies carrying on a business outside the UK. This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that this measure will impact on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will benefit a small number of investment companies who have subscribed for shares in companies carrying on a business outside the UK who dispose of those shares for a loss. This measure is expected to have a negligible impact on investment companies.

One off costs include familiarisation with the tax changes, making a decision on whether to make claim for the loss, determining the tax residency of the company that issued the shares and informing us of this information.

Investment companies will continue to make a claim to HMRC for the relief as they do now. There are not expected to be any ongoing costs. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be HMRC costs to implement this change which are estimated to be in the region of £0.5 million which cover both Income Tax changes and compliance costs.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, contact Jon-Paul Rosser on telephone: 03000 551725 or email: jon-paul.rosser@hmrc.gov.uk.