CORONAVIRUS - LOSSES - 30.04.2020

Tax break for owners of companies in trouble

Coronavirus is having a devastating effect on the trade of many companies which might result in closure or a negative balance sheet. What tax relief for these losses is available to the shareholders and when can they claim it?

Company losses

If your company incurs losses from trading, for whatever reason, it can claim a corresponding amount of relief to reduce taxable profits for the year previous to the loss-making one or a later one. Unfortunately, this may have little or no financial benefit for the company’s shareholders.

Example. Two years ago Tom, Dick and Harry put up £50,000 each on share capital to get their company Acom Ltd off the ground. The going has been tough and the coronavirus lockdown is about to send the Acom’s balance sheet well into the red and may eventually put the business beyond rescue. If that happens Tom, Dick and Harry will have lost their start-up capital.

Capital loss

If Acom goes under with its balance sheet in the red, Tom, Dick and Harry will each have lost £50,000 for which they can claim capital gains tax loss relief. The trouble is unless they make capital gains (in excess of their annual exemption, £12,300 for 2020/21) in the year of the loss or a later one, the relief won’t result in any tax saving. Tip. In the right circumstances a capital loss can be converted to an income tax loss for which relief can be claimed against tax paid on other income.

Example. If Tom, Dick and Harry had each taken an annual salary of £30,000 on which they had paid PAYE tax, they could use income tax loss relief to obtain a refund for the year the company is wound up, the previous year, or both.

Tip. Alternatively, if they are married or in a civil partnership they could transfer some or all of their shares to their partners who could claim the relief against their income. This would be the best option if they had, say, taken only a small salary from Acom on which they paid no tax, or if their spouse paid income tax at a higher rate than them.

Conditions for income tax

The main conditions for claiming share loss relief are that: (1) the shares were issued either through an enterprise investment scheme or the shareholder subscribed for the shares; and (2) the company carried on a qualifying trade.

For detailed commentary on the conditions and application of share loss relief, visit http://tipsandadvice-tax.co.uk/download (TX 20.15.03).

Company recovers

If Acom pulls through, Tom, Dick and Harry might still be entitled to claim capital gains or income tax loss relief in the interim. This is possible if Acom’s shares become worth more or less nothing (HMRC refers to this as negligible value). Example. By 1 July Acom’s balance sheet is badly in deficit but it obtains a loan to keep it going. Tom, Dick and Harry, aren’t sure the company will pull through, and certainly not for a year or two, but they are willing to risk it. If they can show that Acom’s shares have negligible value, say in August 2020, HMRC will treat Tom, Dick and Harry as having made a capital loss which they can convert to an income tax loss as described above (see The next step ).

For free sample negligible value and share loss relief claims and more information about negligible value claims, visit http://tipsandadvice-tax.co.uk/download (TX 20.15.03).

Subject to conditions, shareholders or their spouses can claim capital gains tax relief which can be converted into income tax relief for the amount they invested as ordinary share capital. Relief can be claimed when the company is wound up or if its shares become worthless. A claim isn’t affected if later the shares regain value.

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