You’ve reluctantly decided to withdraw your company’s investment in another business. The bad news is that you’ll make a loss on the value of the shares. What tax relief, if any, can your company claim for this?
Corporate investment
Using your own investment company to buy shares in a qualifying trading company can be tax efficient as any dividends it receives are exempt from corporation tax. However, if the businesses doesn’t succeed you may decide to sell or write off your company’s investment for less than its original cost. In this situation there are different ways in which you can obtain tax relief for the loss.
Triggering a loss
If your company sells its shares for less than it paid for them, the other company is dissolved or the shares become worthless (HMRC refers to this as having negligible value), a capital loss arises for which tax relief can be claimed.
Example. Your company, Acom Ltd, subscribed for 300 ordinary shares in Bcom Ltd, a trading company, for £40,000. Bcom’s business hasn’t succeeded but the directors and other shareholders want to continue. They offer to pay your company £10,000 for the shares leaving you with a capital gains tax (CGT) loss of £30,000. Your company can use this to reduce its corporation tax bill.
Loss relief
Your company can use the losses to reduce tax on any other gains it makes in the same accounting period. However, if it doesn’t have other gains, or the loss exceeds them, the unused amount can be carried forward to set against future gains. However, this means your company will have to wait before it benefits from any tax relief.
Tip. To obtain tax relief sooner you could sell other investments which have increased in value in the same financial period, e.g. property or shares listed on the stock market. These don’t have to be in unquoted companies. However, if your company isn’t able to generate capital gains this way, potentially there is a better alternative.
Alternative claim
If Acom, from our earlier example, has no gains against which it can use its CGT loss, but has income, subject to conditions it can elect to receive a corporation tax deduction from it. If Acom’s income for the financial period in which it sold the Bcom shares was £25,000, by making the claim it can reduce its corporation tax bill to zero. What’s more, the losses that aren’t used can be carried back and set against Acom’s tax bill for the previous year.
Tip. Where you make a claim to use losses in an earlier financial period any left over, i.e. where they are greater than the company’s income, can’t be carried forward and used to reduce tax payable for future accounting periods. It might therefore be more tax efficient not elect to carry back the loss relief.
If your investment company makes a capital gains tax loss, it can be deducted from capital gains it makes in the same financial period or carried forward and used against gains in later years. Alternatively, subject to conditions, it can receive earlier tax relief by electing to use the loss against its income for the last year.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.