It is important to be aware of the alternative means of finance while your business is in a healthy position. Leave it too late, when there are doubts the funds can be returned to the shareholder, and issues may arise with tax relief for the loss of funds.
If you run a family business, a shareholder will not always consider the advantages and disadvantages of the different finance options. It is very common for money to be injected into the company as an informal loan rather than making a further subscription for shares.
What tax relief is available on losses?
In general terms, a loss on a disposal of ordinary shares in a qualifying trading company may give rise to income tax relief. The loss can be set against income and so reduces the overall income tax liability. In the case of loans you may suffer a capital loss, which can only be set against capital gains to reduce your capital gains tax (CGT) liability.
Certain conditions must be met in both cases.
Share capital losses
A loss on a disposal of shares is by default a capital loss. However, a loss on a disposal of shares which have been subscribed for in a qualifying trading company can be relieved against your income rather than capital.
If the shares are not actually sold, a claim can be made to treat them as if they had been, so long as their value has become negligible. Be aware that HM Revenue & Customs (HMRC) may seek to deny the claim if the company is in financial difficulties, on the basis that the shares had little value at the time of the subscriptions.
Certain trades are excluded including: companies whose trade consists of property development, farming, and nursing home management. Please contact us for full details.
If a company ceases to trade and a loan is still outstanding, this may lead to a capital loss since the loan will be irrecoverable. This may be offset against current capital gains or carried forward until gains are realised in the future.
The loan must have become irrecoverable, and HMRC will again seek to deny the claim if the company is already in financial difficulties at the time the loan is made.
Are there any other options?
Most taxpayers will prefer an income tax loss over a capital loss. For this purpose it is possible to convert a loan into shares before making a claim, and taking the loss on income.
If your company is already in financial difficulties, it means the value of the loan will be very low and hence the value of the new shares will also be very low. If the loan still has some value, the cost of the new shares is calculated according to their value at the date of acquisition and not the value of the loan that is given up.
The rules are complex, so please contact us for further advice on the best course of action for your business.
Phone: 0141 643 9200
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
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