Monthly Tax Idea - June 2012

The 2012 Budget 2012 included plans to cap all otherwise uncapped income tax reliefs from April 2013.  Income tax share loss relief is likely to be subject to this limit. Top rate taxpayers who take claim their losses this year:

• can obtain relief at 50% rather than 45%;
• may be able to claim relief against their income for 2010/11 or 2011/12; and
• will not see their loss relief restricted to the higher of £50,000 and 25% of income as it would be if claimed for 2013/14. 

There is no need to dispose of shares to crystallise a loss: any shares that are still owned but whose value is now “negligible” can be the subject of a claim. The company does not even have to be in administration or liquidation: provided the shares could not be disposed of for any meaningful value and there is no prospect of their value recovering, a claim may be made.  A typical case would be a company with negative assets which depends on its lenders (who could be the shareholders) for support. 

What shares qualify?

Income tax share loss relief applies to shares, acquired by subscription, which:

• qualified for Enterprise Investment Scheme (EIS) relief, or
• are shares in a “qualifying trading company”.

EIS-qualified shares are usually easy to identify because most shareholders who could have claimed EIS relief will have done so but:

• shares on which the subscriber could have claimed relief but didn’t also qualify; and
• shares for which the relief was restricted, or not claimed because of the restrictions on the amount of EIS relief also qualify.

The definition of shares in a “qualifying trading company” is based on the EIS rules but wider, depending on when the shares were issued. The following basic rules apply to the company.

• It must carry on a qualifying trade or be the holding company of a group that mainly carries on a qualifying trade: land and property dealing and development;  finance (banking, leasing, commodity trading); and trades that are based on the use of property, such as hotels and nursing homes don’t qualify for the relief.
• It must not be controlled by another company.
• Any subsidiary or subsidiaries of the company must carry on a qualifying trade.  
• It must meet the gross assets test – for shares issued after 5 April 2006 the company’s gross assets before the shares were issued must not exceed £7m before and £8m after the shares were issued (for shares issued before 6 April 2006 the limits were £15m and £16m respectively).
• The company must be unquoted but that can still include shares listed on AIM.
   
   

What value is “negligible”?

HM Revenue & Customs (HMRC) will only accept that “negligible value” effectively means worth next to nothing when compared with their nominal value which can mean the it is more difficult to establish that shares issued at a  premium have become worthless. However, the value to be assessed must be a “real world” value reflecting the potential costs of disposal.

HMRC may be sceptical about claims that shares in a company that is still trading are worthless, arguing that the fact the shareholders have not put the company out of its misery must mean that the company retains more than merely negligible value. Such arguments are often worth less than the shares concerned: what matters is present value, not some vague hope that the company’s fortunes may turn up in the future.  A company may effectively be on “life support” to protect shareholders with loans outstanding to the company money or at risk of personal guarantees being called in.  Often a robust valuation exercise is needed to support a claim to negligible value and any necessary valuations should be obtained before a claim is made: it is better to pre-empt an HMRC enquiry by presenting a strong case from the start than to start off on the back foot by giving HMRC more reason to raise enquiries.

What to do now?

Anyone who owns shares in a trading company that were originally bought by subscription needs to consider what the true value of those shares is. If they have become worthless the potential advantages of making a claim now include:

• obtaining tax relief at this year’s top income tax rate of 50%, not next year’s rate of 45%;
• improving personal cash flow by obtaining the tax relief for this year or even carrying the relief back for up to two years if the valuation exercise shows that the company’s value has been negligible for some time;
• avoiding the restriction, due to come into effect in 2013/14 which will cap all income tax losses that are not already subject to a monetary cap, to £50,000 or, if higher, 25% of the claimant’s income.

The conditions for the relief involve complex technical rules and may depend on skilled negotiation with HMRC. Taking advice will help you to decide what relief is available and what options for claiming relief best apply to your personal circumstances.

If you would like more information, please contact us.