Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 47: USE OF TRADING LOSSES AGAINST CHARGEABLE GAINS
SUMMARY
1. This clause increases the amount of trading losses that may be set against chargeable gains. Under the clause, the maximum amount will be equal to the quantum of gains before taper relief, rather than after taper relief as now. The change will normally reduce capital gains tax (CGT) liabilities. This change applies for trading losses sustained in 2004-05 and later tax years. Anyone who sustains trading losses in 2002-03 or in 2003-04 may elect for the new treatment to apply.
DETAILS OF THE CLAUSE
2. Subsection (1) amends section 72 of the Finance Act 1991. At present, the maximum amount of the trading losses that can be set against gains is limited to the amount of gains after taper relief has been applied. The amendment provides for the maximum amount to be limited to the amount of gains before taper relief is applied. This amount will be determined, as now, without taking any account of the annual exempt amount.
3. Subsection (2) provides for the amendment to take effect for trading losses sustained in the tax year 2004-05 and later years.
4. Subsection (3) provides for any person who sustains losses in the tax year 2002-03 to elect to use the new way of calculating the maximum amount when setting them against gains in either or both of 2001-02 and 2002-03.
5. Subsection (4) makes provision for an equivalent election in respect of losses sustained in 2003-04.
6. Subsection (5) makes detailed provisions for the elections. They must be made in writing to an officer of the Board within the normal time limits. So if the loss is sustained in the tax year 2003-04, the claim must be made by 31 January 2006, whether the loss is to be set against gains in 2002-03 or 2003-04.
BACKGROUND NOTE
7. Normally, income tax losses may not be set against gains charged to capital gains tax. However, a relief was introduced in the Finance Act 1991 which, broadly, provides that where ?
- an individual has incurred trading losses in a year of assessment, and
- there are eligible trading losses left over after setting them against income in that or the previous tax year,
the excess losses may, up to a maximum amount, be deducted from chargeable gains for the tax year in which the losses arose or the previous tax year.
8. CGT taper relief was introduced in the Finance Act 1998. The relief progressively reduces the amount of a gain that is liable to CGT on the disposal of an asset the longer that asset is held. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the chargeable gains of companies.
9. Allowable losses are set against gains before the application of taper relief. Where the amount of allowable capital losses equals or exceeds the amount of chargeable gains before taper relief, the gains are extinguished by the losses.
10. However, the maximum amount of trading losses that may be set against gains is equal to the chargeable gain after the application of taper relief. So, where taper relief is applied to a gain, the trading losses will not extinguish it, even if the amount of the losses equals or exceeds the amount of the untapered gains.
11. Under this clause, the maximum amount of trading losses will be worked out before taper relief is applied. So if the trading losses equal or exceed the gains, the gains will be extinguished by the losses.
12. The example below shows the calculation at present and with the change to be made by the clause.
| Existing provisions | Under the clause | |
| Gain on the disposal of an asset | £100,000 | £100,000 |
| Trading loss available to be set against gains | £80,000 | £80,000 |
| Calculate maximum amount of losses that may be deducted from gains |
£60,000 (£100,000 * 60%) Restrict maximum deduction of losses to the gain if taper relief was applied (in this example taper relief means that 60% of the gain is chargeable to tax) |
£80,000
Do not use the taper relief calculation to restrict losses. |
| Gain after deduction of available trading losses up to maximum amount |
£40,000 (£100,000 minus £60,000) |
£20,000 (£100,000 minus £80,000) |
| Gain after taper relief is applied |
£24,000 (£40,000 * 60%) |
£12,000 (£20,000 * 60%) |
| Chargeable gain after AEA at £7,700 (2002-03 figure used for illustration) |
£16,300 (£24,000 minus £7,700) |
£4,300 (£12,000 minus £7,700) |
| ?Unused? trading loss |
£20,000 (£80,000 minus £60,000) |
£nil |