Our client subscribed for shares in an unquoted trading company. The shares were acquired in separate tranches on four different dates.
The company is now in administration and there will be no distribution to shareholders. It is planned to make a negligible value loss relief claim under TCGA 1992, s 24(2).
Our client subscribed for shares in an unquoted trading company. The shares were acquired in separate tranches on four different dates.
The company is now in administration and there will be no distribution to shareholders. It is planned to make a negligible value loss relief claim under TCGA 1992, s 24(2).
In view of the words in s 24(2) which deem the disposal as being at the time of the claim, is it possible to make separate claims for each of the blocks of shares that were subscribed for by my client? If it is possible, I would like to make a claim for losses on two blocks of shares to be relieved against his income (under TA 1988, s 574) for 2005-06, with a claim for the losses arising in respect of the other two blocks of shares against his income for 2006-07.
Do readers think that this approach will be successful and, either way, can they provide an explanation for this to justify my course of action either to the client or HMRC?
Query T16,679 — Cornish Pasty.
Reply by New Road:
Cornish Pasty is right to look at what TCGA 1992, s 24 is saying. It does indeed state that where an asset has become of negligible value the individual is treated as having disposed of and acquired the asset for a consideration equal to market value. If market value is nil, then the total allowable cost will create a loss.
It is possible to stipulate an earlier time for the disposal, provided that the earlier time is no more than two years earlier and the asset was owned by the claimant and was of negligible value at that earlier date. Cornish Pasty is, however, not trying to refer back to earlier years and I am not, therefore, going to look at this any further.
We have to look at the rules governing disposals, especially the rules that match the disposal with the relevant acquisition.
These rules are found in TCGA 1992, s 104 et seq.
The first rule in s 104 is that shares of the same class acquired by a person in the same capacity are regarded as 'indistinguishable parts of a single asset'. This pooling does not apply to shares acquired before 6 April 1982 or after 5 April 1998. However, if all of the shares in question are part of this pool, called 'the section 104 holding', it will not be possible to do what Cornish Pasty hopes.
Section 24 does not envisage any sort of part disposal of the asset that has become of negligible value and so there will be a claim for the negligible value to create a loss equal to the entire cost of the one asset, the section 104 holding.
If, however, some the shares were acquired after April 1998, they will be treated as separate assets and so it is possible to make claims for different tranches of shares bought. The section 104 holding, for this purpose, will be just one more tranche, albeit equal to the entire pool.
However, Cornish Pasty should be aware that he or she cannot decide which particular set of acquisition costs makes up the negligible value claim since there are rules to decide which costs are set against which disposal. When looking at what costs to set against the shares on which the claim is being made, TCGA 1992, s 106A will apply. Costs are allocated to disposals in the following order.
1. Same-day acquisitions. This should not be relevant here.
2. Acquisitions within the following 30 days. This could come into play if the second claim is made within 30 days of the first.
3. Post 5 April 1998 acquisitions, taking the most recent first.
4. The section 104 holding.
5. Shares held at 5 April 1982.
Some arithmetical calculation needs to be done to work out how many shares to include in the claim to maximise the allowable loss. I hope that the foregoing is enough to give Cornish Pasty sufficient information to formulate the claim.
Reply by N.K.:
Unfortunately, we have not been given the dates that the shares in question were subscribed for and so the answer to this query depends on 5 April 1998 and whether those shares were acquired either before or after that date, or both. The purpose here is to differentiate between the holdings so that, if possible, the tranches can be treated as different assets, with the losses in question being calculated in the normal way.
With the introduction of taper relief via FA 1998, the capital gains tax rules for the identification of assets held changed. TCGA 1992, s 106A gives guidance as to how to identify share holdings, with Simons Direct Tax Service at C2.701A and also HMRC's help sheet, IR284, explaining the meaning of the rules and giving worked examples.
The effect is as follows.
1. Shares acquired after 5 April 1988 are not pooled and are disposed of on a LIFO (last in, first out) basis.
2. Shares acquired between 6 April 1982 and 5 April 1988 are held in pool called a 'section 104 holding'.
3. Shares acquired between 7 April 1965 and 6 April 1982 are held in pool called a '1982 holding'.
4. Shares held at 6 April 1965 are not pooled.
Therefore, if the dates in question allow for separate identification so that there are at least two holdings for capital gains tax purposes, then separate claims will be allowed under TCGA 1992, s 24(2) and this will mean two separate claims for capital losses to be set against incomes for 2005-06 and then 2006-07.
It should be noted that the date of disposal and reacquisition under s 24(2) is determinable by the shareholder and that the claim can be made not later than two years after the end of the tax year in which the date in question fell. The asset will need to be of negligible value on both the date of the claim and on the earlier deemed date of disposal and acquisition.
Under TA 1988, s 574(1) and (2), a claim may be directed against taxable income for the year of the claim or the preceding tax year and in whichever order is required by the person making the claim. Any unused capital loss will be carried forward and deducted from any chargeable gains in the future.
Extract from reply by Hodgy:
TCGA 1992, s 24(2) applies where an asset has become of negligible value and a claim is made to that effect. The date on which an asset becomes of negligible value and the date of the claim will not be the same date. In the case of Larner v Warrington [1985] STC 442, 58 TC 557, the taxpayer argued that the negligible value claim should be backdated to an earlier tax year when the shares had become worthless. However, this claim failed and the judge said that although the assets had become valueless, they remained in existence. The loss only arose for tax purposes when the claim was made.
Therefore the basic premise of making separate claims for shares in the same company may be possible.
The other point for Cornish Pasty to consider is the date of acquisition of each tranche of shares relative to the company going into administration. In particular, what was the value of any shares purchased at a time when the company was in financial trouble, as the acquisition cost of the shares may be restricted? Where such shares were acquired by conversion of a loan account, any claim under TA 1988, s 574 may be restricted on the basis that the shares had no or little value when the client subscribed for them.
