Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of certain assets that have increased in value. However, not every investment or asset sale results in a gain. Sometimes, you might sell an asset at a loss. The good news is that in the UK, you can use these capital losses to reduce your CGT bill. This comprehensive guide explains how capital losses work, how to claim them, and the best strategies to minimise your CGT liability.
What Are Capital Losses?
A capital loss occurs when you sell or dispose of an asset for less than you paid for it (after accounting for any allowable costs). Capital losses can arise from selling shares, investment funds, property (other than your main residence), or other chargeable assets. These losses can be used to offset capital gains, reducing the amount of tax you owe.
When Can You Use Capital Losses?
You can use capital losses to offset capital gains in the same tax year or carry them forward to offset gains in future years. Losses cannot be carried back to earlier years. You must claim the loss to use it—it doesn’t happen automatically. This means you need to report the loss on your Self Assessment tax return or notify HMRC within four years of the end of the tax year in which the loss occurred.
Allowable Losses Explained
Not all losses are allowable for CGT purposes. To qualify as an allowable loss, the asset must be a chargeable asset, such as:
- Shares and investments (outside of ISAs).
- Second properties or buy-to-let properties.
- Personal possessions worth £6,000 or more (excluding cars).
- Business assets like equipment or shares in a private company.
Losses on assets that are exempt from CGT, such as your main residence (if Private Residence Relief applies) or personal cars, cannot be claimed as allowable losses.
How to Claim Capital Losses
To claim capital losses, you must:
- Calculate the loss by deducting the sale proceeds from the acquisition cost, including any allowable costs (e.g., buying and selling fees).
- Report the loss on your Self Assessment tax return in the ‘Capital Gains Summary’ section.
- If you don’t usually file a tax return but need to report a loss, notify HMRC in writing within four years of the end of the tax year.
Once reported, HMRC will record the loss and allow you to offset it against gains in the same or future tax years.
Offsetting Losses in the Same Tax Year
In the year you incur a loss, you must first set it against any gains made in the same tax year before applying the annual exempt amount (currently £3,000 for 2024/25). This means that losses can help reduce or eliminate the tax you owe on any gains in that year.
Carrying Losses Forward
If your losses exceed your gains in a given tax year, the excess loss can be carried forward indefinitely to offset against future gains. However, you must claim the loss within the four-year time limit or you’ll lose the ability to carry it forward. Losses carried forward must be used in full in future tax years before applying the annual exempt amount.
Using Losses Against Gains on Different Assets
You can use losses from one type of asset to offset gains on another. For example, a loss on shares can offset a gain on a property sale. This flexibility allows you to manage your overall CGT liability across different asset classes.
Example Scenario
Let’s say Sarah sold shares at a £5,000 loss in 2024/25. She also sold a second property that generated a £15,000 gain. She can offset the £5,000 loss against the £15,000 gain, reducing her taxable gain to £10,000. She then applies her annual exempt amount of £3,000, bringing the taxable gain down to £7,000. If Sarah is a basic rate taxpayer, she would pay 18% CGT on that amount, resulting in a £1,260 tax bill instead of £2,700 had she not claimed the loss.
Negligible Value Claims
If an asset you still own has become worthless (e.g., shares in a company that has collapsed), you can make a negligible value claim. This allows you to treat the asset as if you sold it for nothing, creating a capital loss you can offset against gains. To make a negligible value claim:
- Submit a claim to HMRC (you can do this via your Self Assessment return or separately in writing).
- Specify the asset, the date you want to treat as the disposal date, and evidence of its negligible value.
Tips for Effective Loss Management
- Keep Detailed Records: Maintain purchase and sale documentation, costs, and records of any losses claimed for at least five years after the Self Assessment deadline.
- Plan Asset Sales: Consider selling loss-making assets in the same tax year you realise gains to offset your tax liability.
- Use Negligible Value Claims Wisely: Identify worthless investments and make claims early to maximise tax relief opportunities.
- Coordinate with Spouse or Civil Partner: Transfers between spouses are tax-free, so you can manage who realises gains and losses to best use personal allowances and loss reliefs.
Common Pitfalls to Avoid
Some common mistakes taxpayers make when claiming capital losses include:
- Failing to report losses within the required four-year time frame.
- Assuming losses are automatically offset—losses must be claimed to be usable.
- Trying to claim losses on non-chargeable assets like personal vehicles.
- Not keeping adequate records to substantiate losses during an HMRC review.
Getting Professional Advice
Using capital losses effectively can significantly reduce your CGT liability, but the rules can be complex, especially if you have multiple assets, investments, or previous losses carried forward. A qualified tax adviser can help you make the most of your losses, plan disposals tax-efficiently, and ensure compliance with HMRC regulations.
Conclusion
Capital losses are a valuable tool for reducing your Capital Gains Tax liability in the UK. By understanding how to identify, claim, and carry forward losses, you can manage your tax bill more effectively and protect your wealth. Always remember to report your losses, keep detailed records, and seek professional guidance if needed to navigate the rules confidently and maximise your tax efficiency.
