With property and share prices tumbling, more and more investors are nursing losses rather than gains. But if you have to sell at a loss there is one consolation – you can use the loss to reduce your tax bill. Here’s how it works.
‘Chargeable assets’, as HM Customs & Excise (HMCE) calls them, attract capital gains tax if you sell for a profit. But they also qualify for loss relief if you sell for less than you paid. The list excludes assets such as your main home, gilts and cars. But buy-to-let properties are ‘chargeable’, as are shares and some corporate bonds. Beyond these basic examples, the rules get fiddly, so always seek tax advice. For example, futures and options attract capital gains tax and qualify for loss relief, whereas spreadbets don’t.
So, say you sold 10,000 FTSE 100-listed shares – a ‘chargeable’ asset – for £2.50 each last December as a higher-rate taxpayer, having paid £6.00 per share six months earlier. That’s a loss in the last fiscal year (6 April 2007-5 April 2008) of £35,000. But what can you do with it? You can use it to reduce the tax on any other capital gains.
If, for example, you had sold another chargeable asset for £50,000 in January 2008, the overall gain for the year 2007/ 2008 becomes £15,000 (£50,000 – £35,000) in your 2007/ 2008 self-assessment tax return. That means there’s less overall capital-gains tax to pay by 31 January 2009 – £14,000 less (0.4 x £35,000) as a higher-rate taxpayer or £7,000 less (0.2 x £35,000) as a basic-rate taxpayer. (Note for the fiscal year 2008/2009, starting 6 April 2008, there will be a single tax rate on capital gains of 18%).
Alternatively, if you made no other gains in 2007/2008 you can ‘carry forward’ the full loss of £35,000. As soon as you make a ‘chargeable gain’ it can then be used to reduce it. What’s more, there’s no time limit on how long you wait. So keep a note of tax losses. The risk in a long bear market is you forget them and miss out on loss relief later.