Individuals: losses: Losses: set off from 2010-11
TCGA1992/S4 and S4B
Chargeable gains that accrue to an individual on or after 23 June 2010 may be charged at 18% or 28%, depending on the extent to which the individual is able to make use of any unused part of their basic rate band, see CG21000+. Chargeable gains that accrue in 2010-11 before 23 June 2010 are charged at 18%. Gains that accrue on or after 23 June 2010 and that qualify for Entrepreneurs’ Relief, see CG63950+, are charged at 10%.
As different gains may be taxed at different rates in 2010-11 and later years, the value of losses set off against those gains will vary. Typically it will benefit the individual most if losses can be set against gains that would attract a higher rate of tax in priority to gains that would attract a lower rate. To achieve this, TCGA92/S4B(2) permits allowable losses to be deducted from gains in whatever way is most beneficial to the individual, subject to other provisions which constrain their use, see CG21610. This will be whatever set-off minimises the amount of Capital Gains Tax payable. This rule applies to any loss that can be set-off against gains in 2010-11 and later years and is not limited to losses that accrue on or after 23 June 2010.
The same rule applies for the set-off of the annual exempt amount, see CG18000. The annual exempt amount is set off against net gains after deducting losses in such a way as to minimise the amount of Capital Gains Tax payable.
Individuals are free to decide how best to set off losses. Typically the most beneficial way in 2010-11 will be
- first, against gains that would be taxed to some extent at 28%
- then, against gains that would be taxed at 18%
- finally, against gains that would be taxed at 10%.
In later years the choice is simpler, to the extent that there will no longer be a category of gains that are taxed exclusively at 18%. There will be two categories of gains. Gains will be taxed at 18% or 28%, depending on whether any basic rate band is available, or at 10% if Entrepreneurs’ Relief is claimed. So it will typically be beneficial to set-off losses first against gains that may be taxed at 18% or 28%.
However, this will not always be the most beneficial way to use losses. For example, if a gain that might be taxed at 28% has already been charged to tax in another country it might be beneficial not to set off losses against that gain so that tax credit relief can be claimed for the foreign tax, see CG14380+.
TCGA92/S4B(3) makes it clear that permitting losses to be set-off in whatever way is most beneficial is subject to any existing rules that limit the gains from which losses may be deducted, see CG21610.
There is an example at CG21605 to show how losses may be set-off against gains.
There is no change in the entitlement to carry losses forward, see CG21510, or to carry losses back, see CG21550. Such losses are still set off only to the extent needed to reduce net gains to the level of the annual exempt amount, see CG21570. Such losses are also to be used in the year in whatever way is most beneficial. This is illustrated by the example at CG21620.