Tax losses for individuals fall into 2 broad categories:
1. Those that can be set off against income, and
2. Those that can only be set off against capital gains
This update explains in what circumstances trading losses can be converted to capital losses and visa versa.
Converting trading losses to capital losses.
Capital gains are now taxed at a maximum rate of 18% whereas income is taxed at a maximum rate of 40%. Accordingly, whenever possible, trading losses should be utilised against income in the first place.
If surplus trading losses are converted to capital losses, which is an irreversible change, this will always result in the loss of the individuals personal tax allowance, and usually the annual capital gains tax exemption.
We advise caution in adopting this form of loss conversion – the potential downside risk from lost allowances will usually preclude this type of claim.
However the opposite conversion from a capital loss to a trading loss can be very useful.
Converting a capital loss to a trading loss
Only capital losses arising in one particular way can be set off against trading income. The relief is available when there is a loss on shares in a qualifying trading company which an individual has subscribed for.
The opportunity to take advantage of this relief generally arises when a qualifying company is liquidated and the original shareholders lose the cash value of their investment.
Please call if you think you may have a valid claim.