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Am I understanding this correctly? Imagine you have these 3 gains over a tax year

1. 10,000 gain (75% taper relief)
2. 10,000 gain (25% taper relief)
3. 10,000 gain (0% taper relief)

You have also made 20,000 in losses over the same tax year.

Intuitively you may think the total chrageable gain for the tax year to be zero. ie.

75% taper relief of 10,000 gives 2,500 gain
25% taper relief of 10,000 gives 7,500 gain
0% taper relief of 10,000 gives 10,000 gain

Total gain therefore = 20,000. Losses = 20,000 therefore Chargeable Gain = 0. Or so you would think.

However as I understand it the chargeable gain is in fact 2,500 because losses as tapered as well! The procedure is to match the losses against the gains BEFORE applying taper relief. So

10,000 of losses matches up with gain 3)
The remaining 10,000 of losses matches up with gain 2)

There then remains gain 1) which is 2,500

Also note that to minimize the chargeable gain then the losses should be matched up with the gains with the smallest taper relief first. If instead the losses were matched in 1), 2), 3) order then you wuld be left with a gain of 10,000 with ZERO taper relief.

For more info: http://www.hmrc.gov.uk/manuals/CG1manual/CG17976.htm

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Yes, and it has ever been thus (at least from 17 March 1998). The exact ordering of losses is as follows:

1. Deduct losses of the current fiscal year.
2. Deduct losses brought forward from 1996/7 onwards, but preserving the annual exempt amount (these need to have been established in a SA return).
3. Deduct losses brought forward from years earlier than 1996/7, but preserving the annual exempt amount
4. Deduct losses brought back from the year of death, but preserving the annual exempt amount.
5. Apply taper relief.
6. Add any agains from settlements attributable to the settlor (but only up to 2002/3) For 2003/4 onwards the attributed gains less personal losses are added at step 4 and taper relief then applies to the net gains.
7. Apply the annual exempt amount.

Eboli
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2. Deduct losses brought forward from 1996/7 onwards, but preserving the annual exempt amount (these need to have been established in a SA return).

Can the tax payer use his/her discretion when these losses are used. I know they must be used within 5(?) tax years but can these all be used by for example, waiting until the 5th tax year?

Not that I can see any particular advantage in doing this mind you.
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Puduraya,

Several points:

1. Once established capital losses may be carried forward indefinitely. Theoretically it would be possible to set a loss established in 1965 against a gain in 2005. However....

2. The rule on when they must be used is contained in TCGA 1992 s 2(2)(b) which states that "Capital gains shall..." = must "... be charged on the total amount of chargeable gains accruing to the person in the year of assessment, after deducting- (a) any allowable losses accruing to that person in that year of assessment, and (b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous year of assessment, any allowable losses accruing to that person in any previous year of assessment (not earlier than the year 1965/66). (emphasis added).

3. I cannot see any particular advantage in delaying the use of losses - theoretically if you anticipated the rate of CGT would rise you might wish to delay (as would have been the case recently with losses held in trusts as we knew the effective CGT rate was going to rise from 34% to 40% in most cases) because the losses in tax terms become more valuable and this could compensate you for any up front payment of CGT which would not otherwise need to be made. However, it is theoretical because of the rule in (2) above.

Eboli.
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Puduraya,

From your original post:

Also note that to minimize the chargeable gain then the losses should be matched up with the gains with the smallest taper relief first. If instead the losses were matched in 1), 2), 3) order then you wuld be left with a gain of 10,000 with ZERO taper relief.

Note that the Notes on Capital Gains ( http://www.hmrc.gov.uk/worksheets/sa108-notes.pdf ) do specifically tell you to match up losses with the least-tapered gains first. Specifically, see under "Column K and boxes 8.5 and 8.6" on page CGN6, taking note that the percentages in Column J come from the table on page CGN18, so that a higher percentage corresponds to less taper relief.

From your more recent reply:

2. Deduct losses brought forward from 1996/7 onwards, but preserving the annual exempt amount (these need to have been established in a SA return).

Can the tax payer use his/her discretion when these losses are used. I know they must be used within 5(?) tax years...


No - the losses must be claimed within a time limit of five years and ten months after the end of the tax year in which they arose in order to be allowable. This applies to losses arising in the 1996-7 tax year onwards; earlier losses are allowable without being claimed.

There is no time limit on how soon an allowable loss has to be used against a gain - but you do have to use losses against gains, up to the point of fully wiping out the gains for losses in the same tax year, and up to the point of reducing the gains to the amount of the CGT allowance for losses from earlier tax years.

The simplest way of claiming a loss is to include it in the Capital Gains pages of your Tax Return for the year in which it arose. If you have to fill in the Capital Gains pages for some other reason, you must claim all losses for the year in the Capital Gains pages: that's basically part of making the required declaration that "The information I have given in this Tax Return is correct and complete to the best of my knowledge and belief." be true.

If you don't have to fill in the Capital Gains pages for any other reason, you can still answer "Yes" to the "* Answer 'Yes' if: ... – you want to make a claim or election for the year." part of question 8 on the main Tax Return and use them to claim the loss. Or you can make a separate claim for them - but my guess is that unless you give the same details as you would have to anyway for the Capital Gains pages, you're likely to be asked for the additional details - i.e. a separate claim doesn't actually save any work...

See pages CGN11 and CGN12 for the Inland Revenue's precise words on the subject of claiming losses, time limits, etc.

... but can these all be used by for example, waiting until the 5th tax year?

Not that I can see any particular advantage in doing this mind you.


No, you don't have any discretion about when you use them. If you did, you could use it to your advantage on occasions when carried-forward losses are offset against tapered gains and the tapering is going to take the gains down to the CGT allowance anyway.

A rather extreme example of this:

Higher-rate taxpayer.
2003/4: Losses of £24,600, no gains.
2004/5: Gains of £32,800 on business assets held for more than two years, no losses.
2005/6: Gains of £33,100 on non-business assets held for less than three years, no losses.

What the taxpayer actually must do:

2003/4: Carry losses of £24,600 forward. No CGT paid for year.

2004/5: Offset carried-forward losses of £24,600 against gains of £32,800, neatly reducing the gains to the year's CGT allowance of £8,200 and the losses to nothing. Business asset taper relief reduces the gains further to 25% of £8,200 = £2,050. This is within the year's CGT allowance, so no CGT paid for year.

2005/6: No losses available to set against gains, either from the same year or carried forward, and no non-business asset taper relief before three years, so the total taxable gains are £33,100. After deducting the CGT allowance of £8,500, that leaves £24,600 to be taxed at 40%. CGT paid for year = £9,840.

What you would instead do if you had the discretion to delay using the losses:

2003/4: Carry losses of £24,600 forward. No CGT paid for year.

2004/5: Decide not to offset carried-forward losses of £24,600 against gains of £32,800, but to carry the losses further forward. So total chargeable gains before taper relief are £32,800. Business asset taper relief reduces the gains to 25% of £32,800 = £8,200. This is just within the year's CGT allowance, so no CGT paid for year.

2005/6: Carried-forward losses of £24,600 available to set against gains, reducing them to £8,500. No non-business asset taper relief before three years, so the total taxable gains are £8,500. After deducting the CGT allowance of £8,500, that leaves nothing to be taxed at 40%. So no CGT paid for year.

So if the taxpayer had the discretion to delay using the losses, there would be a very big advantage of using it in this particular case: it would wipe out a £9,840 CGT bill! But there is no such discretion, and this hypothetical taxpayer is stuck with the bill.

Gengulphus
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Yeah no wonder people employ accountants to do their tax returns!

Anyway heres another scenario that isn't all that clear. Say you sell 20,000 shares in an AIM companyX at £3 for a 20,000 profit. Now this sell matches up with 2 buys of 10,000 shares at £2 that were purchased in 2 different tax years. So 50% of the gain may be subject to 75% relief and the other may be subject to say 25%. I am assuming this is how it works anyway.

But how does the taper relief work in this case ie. say you also have say 11,000 quid in losses that tax year. Does the single £20,000 gain become 2 separate gains and then you match up the losses with the gain subject to lowest taper relief first?

Can you imagine the dogs breakfast your tax return is going to look like if you've done 500 trades that year? I wonder how many man-hours the IR will have to spend trying to decipher it.
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Anyway heres another scenario that isn't all that clear. Say you sell 20,000 shares in an AIM companyX at £3 for a 20,000 profit. Now this sell matches up with 2 buys of 10,000 shares at £2 that were purchased in 2 different tax years. So 50% of the gain may be subject to 75% relief and the other may be subject to say 25%. I am assuming this is how it works anyway.

But how does the taper relief work in this case ie. say you also have say 11,000 quid in losses that tax year. Does the single £20,000 gain become 2 separate gains and then you match up the losses with the gain subject to lowest taper relief first?


Yes, that's exactly what happens (apart from the fact that business asset taper relief only comes at the 50% (taper percentage 50%) and 75% (taper percentage 25%) levels).

It gets even more fun if for instance the company moves from the main market to AIM during your period of ownership. Now you've got to apportion each of the gains between a non-business asset gain and a business asset gain, according to the number of days it was each of the two. So you now have four separate gains, which could well be at four different taper relief rates (e.g. one purchase had been held for between 1 and 2 years, giving taper percentages of 100% for the non-business part and 50% for the business part, and the other for between 4 and 5 years, giving taper percentages of 90% and 25% respectively)

You also get cases like:

May 1st 2002: Buy 5000 shares
April 1st 2003: Buy 10000 shares
March 1st 2004: Sell 5000 shares
February 1st 2005: Sell 10000 shares

where the share matching rules require you to treat it as 5000 shares bought in 2003 and sold in 2004 (no years of taper relief), 5000 bought in 2003 and sold in 2005 (one year of taper relief), and 5000 bought in 2002 and sold in 2005 (two years of taper relief).

And endless other messy cases.

Can you imagine the dogs breakfast your tax return is going to look like if you've done 500 trades that year? I wonder how many man-hours the IR will have to spend trying to decipher it.

Yes, I can. It can easily turn into a pretty good dog's breakfast on only say 50 sells in a year if you add a few of the complications above.

Long before you get to the 500 trades/year level, you would be very well advised to computerise your records in some way that allows you to produce the Capital Gains information in "computer-generated schedule" form.

As for the man-hours the IR spend on it, I'm pretty certain that in most cases, they do a few simple checks on it (e.g. do all the indicated gains add up to the total? is each tapered gain equal to the relevant untapered gain times the relevant taper percentage? is the taper percentage right for the indicated acquisition and disposal dates?) and leave it at that. It's only if they do an enquiry that it really gets looked at in great detail.

Gengulphus
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Gengulphus (or anyone),

Heres another case, that of an overall loss on a sale, but that contains a loss AND a gain within the calculation. Lets assume an AIM stock.

1/1/2003 - 5,000 shares bought @ £20
1/1/2004 - 5,000 shares bought @ £50
2/1/2005 - 10,000 shares sold @ £30

Overall there is a LOSS of 50 grand on the sale. However for taper relief calcs I assume we have to split into 2 transactions

1) GAIN of 50 grand (75% taper relief)
2) LOSS of 100 grand (Since this is a loss then taper relief is irrelevant)

I think therefore the 100 grand is added onto the total losses for the tax year which are then matched up to the tapered tax year gains (including the above 50 grand gain).

Does the above look right?




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Heres another case, that of an overall loss on a sale, but that contains a loss AND a gain within the calculation. Lets assume an AIM stock.

1/1/2003 - 5,000 shares bought @ £20
1/1/2004 - 5,000 shares bought @ £50
2/1/2005 - 10,000 shares sold @ £30

Overall there is a LOSS of 50 grand on the sale. However for taper relief calcs I assume we have to split into 2 transactions

1) GAIN of 50 grand (75% taper relief)
2) LOSS of 100 grand (Since this is a loss then taper relief is irrelevant)

I think therefore the 100 grand is added onto the total losses for the tax year...


All correct so far, provided we're assuming an AIM share that qualifies for 'business asset' taper relief (not all do, the main exceptions being companies that also have a listing on a foreign recognised stock exchange, and non-trading companies such as property companies and investment trusts).

...which are then matched up to the tapered tax year gains (including the above 50 grand gain)

No: losses are set off against untapered gains, then the gains are tapered, and then your CGT allowance is used against the sum of the tapered gains. So if the 2/1/05 transaction is your only disposal in the year, the result will be that £50k of the loss gets set against the gain, the taper relief on the gain is therefore completely wasted, and the remaining £50k of the loss gets carried forward.

In effect, losses are tapered by the same amount as the gain they are set against. And you do not have the discretion not to use a loss: you must use losses arising in the same tax year as the gains as fully as possible, only carrying them forward if they've wiped out the gains. And after using losses arising in the same year, you must use any carried-forward losses until they are used up or the untapered gains have been reduced to the CGT allowance. In the above situation, you might well prefer to use £17.2k of the losses against the gain, reducing it to £32.8k which is then reduced to £8.2k by taper relief and to nothing by the CGT allowance, and keep £82.8k of losses for use in future years - but you're not allowed to.

On the other hand, if there is a choice of gains to offset the losses against, you can set them off against the least-tapered losses first to maximise their value to you, and indeed are specifically instructed to do so by the Notes on Capital Gains. I.e. if you were in the same situation as above except that you also had £82.8k gains on other assets in the 2004/5 tax year that attracted less taper relief, you can and should offset £82.8k of the losses against those gains and the remaining £17.2k against the gain on the AIM shares. Then you're left with £32.8k of untapered gains for the year, reduced to £8.2k by taper relief and then wiped out by the CGT allowance - and hence no CGT bill.

Or if you had £100k of other gains in the same tax year that attracted less taper relief, you would set the loss against all of those gains, have the £50k gain on the AIM shares reduced to £12.5k by taper relief, then to £4.3k by the CGT allowance, and (assuming you're a higher-rate taxpayer) pay £1,720 CGT on it.

The net result is that the value of CGT losses depends on how they end up being used. Both of the first two scenarios above end up with you paying no CGT - but in the second, the loss has absorbed £82.8k of other gains in the same tax year, and in the first, it will only absorb £50k of gains in subsequent tax years. And in the third, it has absorbed an additional £17.2k of gains in the same tax year, on which CGT of up to £6,880 might have been payable, at a cost of a CGT bill of £1,720.

It's a strange system... Its net result is that if you want to use the 'business asset' taper relief on AIM shares well, you basically want to arrange things so that any losses you take on AIM shares can be absorbed by gains made elsewhere, leaving the gains on AIM shares held for 1 and (especially) 2 years untouched.

Gengulphus
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Thanks to Gengulphus especially for the information on this thread. Ive updated the site http://www.cgtcalculator.com so that it now handles taper relief calculations. I hope correctly but if anyone notices any errors please let me know.
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Thanks to you both, all now understood....not the clearest of systems is it ?
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