Corporate Venturing

Relief for losses

If the disposal of shares, which meet the conditions for investment relief, results in an allowable capital loss, that loss can be set against a chargeable gain, or carried forward to set against future chargeable gains, in the normal way. Alternatively, the investing company may be able to claim that the loss should be set against its income for the accounting period in which the disposal was made, with any excess carried back to periods ending in the 12 months before that period ('loss relief').

The main conditions for loss relief are that

• there must be an allowable loss on a disposal of shares to which investment relief is attributable, such that the relief is not withdrawn in full on account of the disposal
• the shares must have been held continuously by the company since issue, and
• the disposal must be one of the following
  • a 'bargain made at arm's length' for full consideration
  • a distribution in the course of dissolving or winding up the issuing company
  • a disposal within section 24( 1) Taxation of Chargeable Gains Act 1992 (for example, when the issuing company is struck off the Register of Companies and dissolved)
  • a deemed sale following a negligible value claim under section 24( 2) Taxation of Chargeable Gains Act 1992.

The amount of the loss is reduced by the amount of any investment relief retained.

Example

An investing company subscribes £100,000 for 100,000 shares (obtaining investment relief of £20,000).

It retains the shares for 4 years before disposing of them all for £55,000.

The allowable loss is calculated as follows

Loss relief is not available if the disposal falls within the rules on company reconstructions and amalgamations, unless the exchange of shares under the arrangements is carried out for genuine commercial reasons and does not form part of a scheme or arrangement for tax avoidance. If a loss has been increased because the value of the shares has been reduced in circumstances where the investing company, or any other person, receives a benefit (and not just a tax-free benefit), the amount of loss relief available is correspondingly reduced.

Can the loss be carried forward?

It cannot be carried forward as loss relief against income. But, any allowable capital loss that cannot be allowed as loss relief in the accounting period in which it arose, or the previous 12 months, can be set against chargeable gains or carried forward to set against future chargeable gains in the normal way.

If an investing company disposes of part of a holding at a loss, how much loss relief is it entitled to?

The allowable loss is calculated in line with the normal capital gains rules for a disposal of part of a holding, but the amount of the loss is reduced by the amount of investment relief attributable to the shares disposed of. The section 'Circumstances in which investment relief may be withdrawn or reduced' explains the rules if only some of the shares in the holding were shares to which investment relief was attributable.

When can an investing company claim loss relief?

A company cannot make a claim for loss relief unless

• the trade the investment is funding has been carried on by the issuing company or a subsidiary for four months, and
• it has received a 'compliance certificate' from the issuing company, in respect of those shares.

The company may make a claim for any loss meeting the conditions for loss relief to be set against its income within two years after the end of the accounting period in which the loss arises.

If, for an accounting period, a company claims loss relief in respect of two or more disposals, relief for a loss arising from an earlier disposal is given before that arising from a later disposal.

If loss relief is claimed, it must be given before any other deductions from, or set-offs against, the investing company's profits of any description, and before any deduction for amounts treated as reducing those profits.