Capital Gains Tax (CGT) is a tax on the profit when you sell (or dispose of) an asset that’s increased in value. However, if you’ve suffered a loss on an investment, you can offset that loss against your gains to reduce the amount of CGT you owe. Understanding how to report and apply these losses effectively is crucial for tax planning and ensuring you don’t pay more tax than necessary. In this detailed guide, we’ll walk you through the process of offsetting investment losses against CGT in the UK.
1. Understanding Capital Gains and Losses
When you sell an asset (such as shares, property, or other investments) for more than you paid for it, the difference between the purchase price and the sale price is your capital gain. Conversely, if you sell the asset for less than you paid, the difference is a capital loss. Both gains and losses are important when it comes to calculating your CGT liability.
2. Which Assets Are Subject to CGT?
Capital Gains Tax applies to a wide range of assets, including:
- Shares and other investments (excluding ISAs, pensions, and certain government bonds)
- Second homes and buy-to-let properties
- Personal possessions worth over £6,000 (excluding your car)
- Business assets
Each asset’s gain or loss must be calculated individually before being combined to determine your overall CGT liability.
3. Calculating Your Capital Losses
To calculate a loss, subtract the sale price from the purchase price (including costs such as broker fees and legal fees). If the sale price is lower, the result is a loss that can be used to offset gains from other disposals in the same tax year or carried forward to future years.
For example, if you bought shares for £10,000 and sold them for £7,000, your capital loss is £3,000. Keep detailed records of the purchase and sale transactions to support your claim.
4. Offsetting Losses Against Gains in the Same Tax Year
Capital losses must be deducted from any gains made in the same tax year before calculating the tax owed. For instance, if you made a £5,000 gain on one asset but suffered a £3,000 loss on another, your net gain would be £2,000. Only this net gain is subject to CGT (after considering your Annual Exempt Amount).
5. Using the Annual Exempt Amount
Each individual in the UK has an Annual Exempt Amount (£6,000 for 2023/24), which means you only pay CGT on gains above this threshold. You apply your capital losses to reduce your gains before applying the Annual Exempt Amount. This ensures you only pay tax on the net gain that exceeds the allowance.
For example, if your net gain after losses is £5,000, you would pay no CGT because it’s below the Annual Exempt Amount.
6. Carrying Losses Forward
If your losses exceed your gains in a given tax year, you can carry the unused losses forward to offset against gains in future tax years. There’s no time limit for carrying forward losses, but you must report them to HMRC to make use of them later. Include them on your Self Assessment tax return and tick the box indicating that you want to carry forward the unused losses.
Remember, losses carried forward cannot be used to reduce gains below the Annual Exempt Amount—they can only be used to reduce gains that exceed the exempt threshold.
7. Reporting Losses to HMRC
It’s essential to report capital losses to HMRC, even if you don’t have any gains in that tax year. This allows you to carry them forward. Losses can be reported on your Self Assessment tax return (in the ‘Capital Gains Summary’ section) or by writing to HMRC with full details. Keep all relevant documentation, including sale contracts, purchase records, and evidence of associated costs, as HMRC may request them in the event of an enquiry.
8. Special Considerations for Negligible Value Claims
If you still own an asset that has become worthless (e.g. shares in a defunct company), you can make a negligible value claim. This allows you to treat the asset as disposed of at a value of zero, crystallising the loss even though you haven’t actually sold it. This can be particularly useful for shares that are now worthless but still held in your portfolio.
9. Losses on Personal Assets
Losses on certain personal assets (known as ‘chattels’) that are not worth more than £6,000 cannot be claimed. For assets worth over £6,000 (such as art, jewellery, or antiques), losses can be claimed but are subject to special rules, such as the ‘chattels exemption’ and restricted losses if the proceeds are below the purchase price but above £6,000.
10. Seeking Professional Advice
Calculating and claiming capital losses can be complex, especially if you have multiple assets, carryover losses, or are unsure about the treatment of certain investments. Consulting a qualified tax advisor can ensure you maximise your tax efficiency while remaining compliant with HMRC regulations. A tax advisor can also help you with record-keeping, reporting obligations, and strategic tax planning.
Conclusion
Offsetting investment losses against Capital Gains Tax is a smart way to reduce your overall tax bill. By understanding the rules on reporting losses, using the Annual Exempt Amount, carrying losses forward, and making negligible value claims when necessary, you can legally reduce your CGT liability and save money. Keep detailed records, stay informed on HMRC rules, and seek professional help when needed to make the most of your investment losses and keep your tax bill as low as possible.
