Capital Gains Tax: Negligible Value Claims
Background
When physical assets are destroyed there is an actual disposal which will trigger a
capital loss. By contrast, when financial assets such as shares become worthless,
there is generally no event that gives rise to a loss. Accordingly, the tax rules allow
the owner of an asset that has become of negligible value to make a claim for a
deemed disposal in these circumstances.
Negligible value
There is no statutory definition of “negligible”. The view of HM Revenue and
Customs is that it should be taken as being “worth next to nothing”.
Effect of a claim
The effect of a valid claim is that the asset is deemed to have been sold and
immediately reacquired for the negligible amount specified in the claim. In
practice the negligible value is usually taken as nil. The deemed sale therefore
gives rise to a capital loss, computed in the usual way. The deemed sale takes
place when the claim is made, subject to the rules below.
The rules also allow for a limited degree of retrospection for a claim. Subject to the
twin conditions that:• The asset was owned at the earlier time, and
• The asset was of negligible value at the earlier time
the loss may be claimed to have arisen at any specified date not earlier than two
years before the start of the year of assessment in which the claim is made.
Therefore a claim made in say June 2007 would have effect in 2007/08 or, if the
conditions were met, for 2006/07 or 2005/06, at the owner’s choice.
Timing of claim
The rules do not require or deem the negligible value claim to have been made at
the earliest opportunity. Accordingly the owner can claim the loss when the
resultant capital loss is of most benefit to him. There can be a complex interaction
between losses brought forward, current year losses, taper relief and the annual
capital gains tax allowance. The limited retrospection can however help use the
losses to best effect.
Form of claim
The tax rules do not specify any particular form for the claim. A claim for the
current year can be made in a letter to HMRC. A retrospective claim for the
previous year can be included in the tax return for that year. A retrospective claim
for the earliest year can be included in an amendment to the return, where this
remains possible, or otherwise by a standalone claim in a letter to HMRC.
Quoted shares/
“inform” is designed to give a brief summary of relevant rules, as known at the date of issue. Chiene & Tait can accept no responsibility for any loss
arising to any person acting or refraining from action as a result of this “inform”. Advice should be sought in relation to individual circumstances. ©
Chiene & Tait CA.
Chiene & Tait CA 61 Dublin Street Edinburgh EH3 6NL Telephone 0131 558 5800. Fax 0131 558 5899. Web:www.chiene.co.uk. Registered to carry on
audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants of Scotland.
Quoted shares
HMRC maintain and regularly update a list of quoted shares that are accepted as
being of negligible value. This list can be accessed from the following link
http://www.hmrc.gov.uk/cgt/negligible_list.htm
Unquoted shares
The local HMRC officer can deal with negligible value claims meeting some
conditions, but the HMRC manuals say that claims involving losses over £100,000
should be referred to a specialist unit.
Some claims for losses on unquoted companies through negligible value claims
fail. A common scenario is that loans to a failing company are converted to be
used to subscribe for share capital at a time when the shares already have a
negligible value, or on non arms length terms.
Negligible value claims for shares in unquoted trading companies which were
acquired by way of subscription can be combined with a further claim to convert
the resultant capital loss into a loss that may be set against income.
Other points
Some other points to note are:•
Shares in a company that have become worthless cease to exist when the
company is dissolved and struck off the Register of Companies. At that point
there will be an actual disposal of the shares, and so the negligible value
claim procedures will no longer be relevant.
•
A negligible value claim can be accompanied by a post transaction review
check request where the quantification of the loss depends on an estimated
amount, such as a 31 March 1982 market value.
•
In the rare event that the shares or other assets later prove to have value the
effect of the negligible value claim is not reversed. The normal capital gains
tax rules would apply on any future sale, starting from the negligible value as
the base cost. Where shares are accepted as being of negligible value but
payments are later made by a liquidator these payments are taxed as capital
distributions.
May 2007
“inform” is designed to give a brief summary of relevant rules, as known at the date of issue. Chiene & Tait can accept no responsibility for any loss
arising to any person acting or refraining from action as a result of this “inform”. Advice should be sought in relation to individual circumstances. ©
is designed to give a brief summary of relevant rules, as known at the date of issue. Chiene + Tait can
Chiene“inform”
& Tait CA.
accept no responsibility for any loss arising to any person acting or refraining from action as a result of this
Chiene“inform”.
& Tait CA Advice
61 Dublinshould
Street Edinburgh
6NL Telephone
0131 558
5800. Fax 0131 ©
558
5899. Web:www.chiene.co.uk.
Registered to carry on
be soughtEH3
in relation
to individual
circumstances.
Chiene
+ Tait CA.
audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants of Scotland.
Chiene + Tait CA 61 Dublin Street Edinburgh EH3 6NL Telephone 0131 558 5800. Fax 0131 558 5899.
Web:www.chiene.co.uk. Registered to carry on audit work and regulated for a range of investment business
activities by the Institute of Chartered Accountants of Scotland.