Coronavirus is having a devastating effect on the trade of many companies which might result in closure or a negative balance sheet. What tax relief for these losses is available to the shareholders and when can they claim it?
Company losses
If your company incurs losses from trading, for whatever reason, it can claim a corresponding amount of relief to reduce taxable profits for the year previous to the loss-making one or a later one. Unfortunately, this may have little or no financial benefit for the company’s shareholders.
Example: Two years ago, 3 partners put up £50,000 each on share capital to get their company ABC Ltd off the ground. The going has been tough and the coronavirus lockdown has sent the ABC’s balance sheet well into the red and may eventually put the business beyond rescue. If that happens all 3 partners will have lost their start-up capital.
Capital loss
If ABC goes under with its balance sheet in the red, each partner would have lost £50,000 for which they can claim capital gains tax loss relief. The trouble is unless they make capital gains (in excess of their annual exemption, £12,300 for 2020/21) in the year of the loss or a later one, the relief won’t result in any tax saving.
In the right circumstances a capital loss can be converted to an income tax loss for which relief can be claimed against tax paid on other income.
Example: If all the partners had each taken an annual salary of £30,000 on which they had paid PAYE tax, they could use income tax loss relief to obtain a refund for the year the company is wound up, the previous year, or both.
Alternatively, if they are married or in a civil partnership, they could transfer some or all of their shares to their partners who could claim the relief against their income. This would be the best option if they had, say, taken only a small salary from ABC on which they paid no tax, or if their spouse paid income tax at a higher rate than them.
Conditions for income tax
The main conditions for claiming share loss relief are that:
• the shares were issued either through an enterprise investment scheme or the shareholder subscribed for the shares;
• and the company carried on a qualifying trade.
Company recovers
If ABC pulls through, all the 3 partners might still be entitled to claim capital gains or income tax loss relief in the interim. This is possible if ABC shares become worth more or less nothing (HMRC refers to this as negligible value).
Example: By 1 August ABC’s balance sheet is badly in deficit but it obtains a loan to keep it going. The partners aren’t sure the company will pull through, and certainly not for a year or two, but they are willing to risk it. If they can show that ABC’s shares have negligible value, say in September 2020, HMRC will treat partners as having made a capital loss which they can convert to an income tax loss as described above.
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