Capital losses: Don’t forget to claim!

Capital losses can easily be forgotten or overlooked. For example, no capital gains may have been made to offset in the same tax year, and there might be little prospect of capital gains arising in the foreseeable future.

How and when to claim

If an individual incurs a capital loss in a tax year, it is not allowable unless it is notified to HM Revenue and Customs (HMRC) and the amount of that loss is quantified (TCGA 1992, s 16(2A)).

If HMRC has issued the individual with a notice to file a self-assessment return for the tax year, the loss must be quantified and claimed in the return (TMA 1970, s 42(2)). For taxpayers not within the self-assessment regime, capital loss claims can generally be made in writing to HMRC.

The normal time limit for capital loss claims by individuals is four years after the end of the relevant tax year (TMA 1970, s 43).

Can you prove it?

Even if a capital loss has been claimed, it may nevertheless be difficult to prove in the absence of proper records. However, in Goksu v Revenue and Customs [2022] UKFTT 213 (TC), the taxpayer was able to convince the First-tier Tribunal (FTT) on this point.

In Goksu, the taxpayer bought a property in Stratford (‘The Grove’) in 1989 for ￡1,313,794.?Due to an economic downturn, on 27 August 1998 the taxpayer sold The Grove for ￡990,000. The taxpayer’s accountant at the time completed a capital loss computation and submitted it to the Inland Revenue (as it then was) in 2000 as an amendment to the taxpayer’s tax return for 1998/99.

The taxpayer owned another property (‘Broadway’), which he had bought in the 1980s. On 13 March 2015, the taxpayer sold Broadway for ￡1,380,000, realising a gain. By that time, the taxpayer had changed accountant. The new accountant prepared the taxpayer’s tax return for 2014/15. The original return did not include the loss on sale of The Grove, and an amended return was submitted on 31 January 2017, which deducted the loss from the sale of The Grove from the gain on Broadway.

HMRC subsequently opened an enquiry into the taxpayer’s tax return for 2014/15. HMRC asserted that the taxpayer could not use the loss from 1998 to reduce his subsequent gain because he had not notified HMRC of that loss within the relevant time limit. HMRC also imposed penalties for inaccuracies in the taxpayer’s amended tax return for 2014/15 relating to the amount of tax on the gain, contending (among other things) that the use of the previous loss was a careless inaccuracy.

However, the First-tier Tribunal (FTT) found on the evidence that the taxpayer (through his accountant) notified HMRC of the loss relating to The Grove in 2000. As the FTT found in favour of the taxpayer on the capital loss claim issue, the tribunal concluded that the penalty in respect of the inclusion of the loss on The Grove should be reduced to zero.

In practice, disputes with HMRC should be prevented by ensuring that capital losses are quantified and claimed within the statutory time limit, and that good records are kept in support of capital loss claims (e.g., contracts for the purchase and sale of the asset, the cost of any asset improvements, and incidental costs of acquisition and disposal).

Practical point

For long-standing losses (i.e., those made before 5 April 1996), there is an exception to the normal four-year time limit for claiming capital losses. HMRC guidance states that taxpayers can still claim for such losses, by deducting them after any more recent losses (see www.gov.uk/capital-gains-tax/losses).

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