Capital Gains Tax on Losses From Trusts

Capital Gains Tax (CGT) can represent a significant outlay in some circumstances. Essentially, CGT charges arise when assets have increased at value at the point at which they are 'disposed of'. This disposal could be through sale, exchange or gift. In these instances, CGT will be levied at a flat rate of 18% for basic rate taxpayers, and 28 per for higher rate taxpayers, on all gains above the annual exempt amount.

There are a number of exceptions to this, including such things are transfers between spouses or the sale of a main home. These exceptions are covered in more detail in another article in this section. Another important method by which a Capital Gains Tax liability can be mitigated, however, is through the efficient use of allowances made for capital losses.

Allowable Losses

Allowable losses arise when the proceeds derived from the disposal of the assets are less than the costs incurred. The most common situation in which this will happen is when an asset loses value over the course of your ownership. For example, company shares may be transferred into a trust when they hold a value of £5 per share. If while in trust they decrease in value, and are eventually sold again at a value of, for example, £4 per share, an allowable loss will arise.

These losses can be written off against any capital gains made. An individual's total CGT liability is calculated not per transaction, but at the end of each tax year. In general it is not possible to defer capital losses, although it is frequently possible to defer chargeable gains. At the end of the tax year, therefore, total allowable losses are deducted from all relevant chargeable gains for the same period. The resulting figure will represent your total capital gains liability for that year.

Deferral

In cases in which allowable losses have been deferred, those brought forward from the 1996-97 tax year or later must be taken into account first. When deducting deferred allowable losses, only losses sufficient to reduce the total CGT liability to the annual exempt amount should be taken into account. Any excess deferred allowable losses should be further deferred until such a time as they can be used effectively.

It may be useful to provide some examples of the workings of allowable losses. Your total chargeable gains for the year may be, for example, £10,000. If your allowable losses come to £8,000, all of these will be deducted from the gains. This will reduce your liability to £2,000, which is below the annual exempt amount. Thus, no CGT will be payable. If, however, your losses exceed your gains (for example, if your chargeable gains total £10,000 and your total allowable losses total £12,000) then you will be able to carry forward your £2,000 loss in order to offset gains in future years.

It should be noted, however, that when your gains exceed your losses but your total liability is still below the annual exempt amount, it is not possible to carry a percentage of your losses forward.

HMRC offer extensive guidance on Capital Gains Tax. This is a complex area, and one in which professional advice will frequently be needed.