Share Loss Relief: background: key aspects to consider
Whether Share Loss Relief is claimed by an individual or by a company, many of the conditions which must be met and many of the concepts involved are the same. This part of the guidance looks briefly at the provisions which are common to both types of claimant, and which have remained unchanged (or nearly so) since the relief was introduced. You will need to bear these basic principles in mind when considering a claim to relief.
An allowable loss must accrue on a disposal of shares
The claimant must have incurred an allowable loss on a disposal of shares in a company. The rules for deciding whether a loss is allowable, and for computing its amount, are in the Taxation of Chargeable Gains Act 1992, and detailed guidance on these issues is in the CG manual at CG15800. Notice in particular that in order to be allowable a loss must be notified to HMRC - see CG15813. There are further rules concerning the shares disposed of which determine whether the allowable loss is eligible for Share Loss Relief but they do not affect the amount of the allowable loss for TCGA purposes.
It is not necessary for a person to sell the shares in order for an allowable loss to arise: TCGA deems there to have been a disposal, and a loss may accordingly arise, where shares have been lost or extinguished, or have become of negligible value. For guidance on these deemed disposals, see CG13118. For guidance in the context of Share Loss Relief see VCM74110+ and VCM77070.
The disposal must be by way of a bargain at arm’s length (see VCM74090), or by way of a distribution in the course of winding up or dissolving the company (see VCM74100). For guidance on the meaning of arm’s length, see also CG14541. For guidance on distributions in winding-up being treated as disposals of shares, see also CG40430.
The amount of the allowable loss: value shifting
Under the computational rules contained in the TCGA, an allowable loss may be reduced if a scheme has been implemented or arrangements have been made whereby
- the value of an asset is materially reduced, and
- a tax-free benefit has or will be conferred
For guidance on these value shifting rules, see CG13260.
Where there exists such a scheme or arrangements the maximum amount of Share Loss Relief available in respect of the loss will clearly be reduced. In fact, where there is a claim to Share Loss Relief (by an individual or by a company) the value shifting rules apply as if the reference to a tax-free benefit mentioned above were a reference to any benefit, whether tax-free or not. This extension of the scope of the value shifting rules is at TCGA92/S125A(2).
Shares must be subscribed for
In order for a loss to be eligible for Share Loss Relief, the shares in question must have been subscribed for by the claimant, that is to say they must have been issued by the company directly to the claimant in return for consideration. Shares bought from a previous owner will not generally qualify for Share Loss Relief, unless Enterprise Investment Scheme (EIS) relief is attributable to them and the claimant is an individual. There is detailed guidance on the meaning of ‘subscribed for’ at VCM74060.
This rule is relaxed in certain closely-defined circumstances, such as where the shares disposed of are identified with other shares which were subscribed for, or where the shares were subscribed for by the claimant’s spouse or civil partner and then transferred to the claimant during their lifetime. See ‘special cases’ under VCM74060.
Where shares are subscribed for jointly by more than one individual, or via a nominee, you may accept that each individual subscribes for an appropriate proportion of the shares issued.
Limited activities of the issuing company
Consistent with the policy intentions underlying Share Loss Relief, the company whose shares give rise to the loss must satisfy certain conditions. Very broadly, it must be an unquoted trading company which was below a certain size when it issued the shares: the precise conditions which must be met at the time of issue and at later times up to the time of disposal changed from time to time (see VCM70130). In the hands of an individual, shares to which EIS relief is attributable are automatically eligible for Share Loss Relief as the conditions for EIS relief closely resemble those for Share Loss Relief. There is no automatic entitlement to Share Loss Relief on shares to which SEIS relief (see VCM30000+) is attributable, but relief is available if the general Share Loss Relief conditions are satisfied.
Requirement to make a claim
Share Loss Relief depends on there being an allowable loss for chargeable gains purposes, so the first requirement is that there should actually be an allowable loss. A person (an individual or a company) must give notice to HMRC quantifying the loss before it can be an allowable loss. For guidance on notifying allowable losses, see CG15813 (for individuals) and CG40235 (for companies).
There is a special anti-avoidance rule in TCGA 1992 which applies to disposals on or after 6 December 2006. Under this rule, a loss will not be an allowable loss if it arises in connection with arrangements a main purpose of which is to obtain a tax advantage, including an income tax advantage, so this rule can strike down claims to Share Loss Relief in appropriate cases. There is guidance on the application of this anti-avoidance rule at CG15835.
Share Loss Relief must be claimed as such and the claim is a separate matter from establishing the allowable loss. An individual must make a claim on or before the first anniversary of the normal self assessment filing date for the year of the loss. An investment company must make a claim within two years of the end of the accounting period in which the loss accrues. For guidance on claims by individuals, see the self assessment claims manual (SACM) and for guidance on claims by companies, see CTM90602.
Where a company has been struck off the register of companies, with or without having been dissolved, there is no requirement for the claim to an allowable loss or the claim to Share Loss Relief to be made before the striking-off. TCGA92/S24(1) treats the striking-off as a disposal of the shares, and the negligible value provisions at section 24(2) will not be in point.
A claim must specify the tax year or years, or the accounting period or periods, for which the relief is to apply.