Claiming loss relief on a share disposal.

We've previously discussed shares and negligible value claims, however by claiming loss relief on a share disposal you can also reduce your income tax liability. This post discusses the circumstances where it's possible to make a valid claim.  

Claiming loss relief on share disposal

When claiming loss relief on a share disposal, you will need to consider the circumstances in which the loss arose. The important point to mention is that a loss on a share disposal must qualify for capital gains tax loss relief before considering whether income tax loss relief applies. A share disposal, potentially qualifies for capital gains tax loss relief in the following circumstances: 

  • Where the disposal occurs as a result of an arm's length sale. 
  • When the disposal forms part of a distribution made in the course of dissolving or winding up a company.
  • As a result of a the entire loss or destruction of the asset concerned.
  • In connection with a negligible value claim (see above).

It should be mentioned that relief is restricted in circumstances where the loss arises as result of a company's reconstruction for capital gains tax purposes.

Shares - qualifying conditions required

In order to claim income tax loss relief on a share disposal you must ensure the shares qualify. Therefore, the shares must fulfil one of the following qualifying conditions:

  • The company is an EIS qualifying company. If income tax relief has been claimed on the original investment and not withdrawn then the shares are qualifying shares eligible for income tax relief. Additionally, the shares must be ordinary shares with full rights and not shares which have preferential rights to capital or dividends.
  • Alternatively, if EIS relief is not attributable to the shares, they must be shares in a qualifying trading company (see below) which you have acquired by way of subscription. As is the case above, the shares must be ordinary shares with full rights and not shares which have preferential rights to capital or dividends.

It should be noted that shares in a trading company includes stock, though does not include shares or stock which do not form part of a company's ordinary share capital.

Qualifying trading company

There are a number of stipulations which are attached to what is termed a qualifying trading company and these are set out in the taxes legislation and HMRC's guidance. In addition, the taxes legislation was amended in 2020 so that non-UK companies can potentially qualify.

Amount of relief available

A claim for share loss relief is subject to a limit of the higher of £50,000 or 25% of your adjusted net income. However, the restriction does not apply to losses arising from investments in EIS or SEIS qualifying shares.

Conditions applied to individuals

To qualify for relief you must have subscribed for the shares. However they can have been subscribed for by your spouse or civil partner and transferred to you. A subscription may also be made by a nominee on your behalf or on behalf of joint owners.

To subscribe is defined as meaning the shares are issued by the company in consideration for money or money's worth.

HMRC have argued previously that relief is not available for jointly-owned shares. However they have now confirmed a policy change which means that for joint owners Income Tax relief is divided equally between the joint owners.

Share for share exchanges

Occasionally, shares are acquired as a result of a share for share exchange. Typically this happens when one company buys out or takes over another company. In this situation, you are treated as if you subscribed for shares in the new company.

In order to claim relief in this scenario, firstly the shares in the old company must have qualified if share relief had been claimed on them. Secondly, the shares in the new company must also have qualified for share loss relief if acquired by subscription.

If shares in the new company do not qualify then relief is restricted to the amount of  consideration received (if any) on the exchange of shares in the new company. This could prove to be a nasty shock as your loss will potentially be restricted to the subscription price of the shares in the old company. In practice this may be considerably lower than the shares when they are valued on a company takeover.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

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