Normally where an individual disposes of shares at a loss, the capital loss is set against gains of the same tax year or carried forward for use against future capital gains. Legislation commencing at ITA 2007 s131, however, in certain situations allows the capital loss to be set against income of the individual for the current and/or previous tax year. As they are not EIS shares, they need to be shares in a qualifying trading company which the individual subscribed for.
ITA 2007 s134 states – “In relation to shares to which EIS relief is not attributable (see section 131(2)(b)), a qualifying trading company is a company which meets each of conditions A to C.”
Starting with condition A, s134(2) goes on to state – Condition A is that the company either–
(a)meets each of the following requirements on the date of the disposal–
(i)the trading requirement (see section 137),
(ii)the control and independence requirement (see section 139),
(iii)the qualifying subsidiaries requirement (see section 140), and
(iv)the property managing subsidiaries requirement (see section 141), or
(b)has ceased to meet any of those requirements at a time which is not more than 3 years before that date and has not since that time been an excluded company, an investment company or a trading company.
The definition of a qualifying subsidiary is found at ITA 2007 s191, unfortunately though to meet this requirement, the subsidiary needs to be a 51% subsidiary of the relevant company. Your client would not therefore be able to set his capital loss against his income. Conditions B and C would not even need to be considered. The capital loss in this case could only be set against capital gains.
It is worth remembering though that if all of the conditions were met and the capital loss could be set against income, ITA 2007 s24 imposes a limit on the amount that can be set sideways. The limit is the greater of £50,000 or 25% of the individual’s adjusted total income for the tax year. The relief cap applies to share loss relief claimed under ITA 2007 s131 but only in situations where the shares do not qualify for either EIS or SEIS relief.
