Losses on unquoted trading company shares
Most tax advisers can tell clients about the tax relief potentially available if they have suffered losses on unquoted trading company shares for which they subscribed (ie new shares issued by the company).
Under very specific rules, these losses can be set against the client’s income for the year of the loss and for the prior year. From 6 April, this could give tax relief at 50% of the amount paid – not perfect but better than the tax relief normally available for losses suffered on share investments. But our recent experience suggests that some investors do not know the full story, a view borne out by a recent tax case involving an individual who spent £400,000 in buying new shares in his company. The company, which owned a ship moored on the Thames, went into administration and the investor Mr Harper, tried to set off his losses against his other income. Had he succeeded, his overall loss might have been reduced to £240,000.
But HMRC opposed this, on the grounds that the shares were never worth anything (Mr Harper invested to stop the company and perhaps the ship going under sooner) and that he had lost nothing on the shares. The tribunal supported HMRC on this point, meaning that he got no tax relief at all and lost the whole £400,000. Before subscribing for new shares, people need to consider this; if the company is worthless after the investment, it cannot have increased in value.
There might be a better (ie more tax efficient) way of investing the money – please, please, please, take advice!
David Mansell is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with David you can call him on 01604 669330.
Date: 12th February, 2010
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