When Investments Go Bad! Claiming Tax Relief

Buying property ‘off plan’ can be an attractive proposition. Developers often offer substantial discounts to those who are prepared to commit before the first brick has been laid, thereby providing the potential to make a significant gain by the time the property has been completed. However, unforeseen events may mean that even the best laid plans go awry.

This article looks at the relief that may be available if instead of the hoped-for gain the developer goes into liquidation and the initial investment is lost. This article examines the tax relief that may be available in this type of situation.

Asset of Negligible Value

Tax relief is available when an asset is lost or destroyed or becomes of negligible value. The relief is given in the form of a capital loss. As with other capital losses, the loss is available to set against capital gains of the same or later tax years.

An asset is of negligible value if it is worth next to nothing. For example, if a person invests in a property off plan and the developer goes into liquidation before work has commenced and there is no money to return to investors, the investor’s initial investment in the property would be regarded as having become of negligible value. In other words, the investment has become worthless.

To claim the relief, the investor must own the asset at the time that it became of negligible value. The amount of the relief is the loss that would arise if the asset was sold and immediately reacquired at the time it became of negligible value. The loss is computed in the usual way and account is taken of the costs of acquisition or disposal, such as legal costs, reservation fees, etc. However, the proceeds are nil or, where a small sum is recovered by the investor that sum.

Example

In October 2008, James entered into an agreement with a developer to buy two flats off plan for a price of £200,000 per flat. His intention was to let the flats once completed.

He paid a reservation fee of £500 per flat in November 2008 and an initial deposit of £20,000 per flat in December 2008. Work on the development was due to start in early 2009. Subsequent payments of £50,000 were due in March 2009, June 2009 and September 2009, with a final payment of £30,000 due on completion. Completion was scheduled for November 2009.

James also paid legal fees of £3,500 in relation to the purchase.

However, due to a slowing property market the developer was unable to sell completed properties and did not have the funds available to commence the development on schedule and consequently the start of the project was delayed. By January 2010, the project was still on hold. In May 2010 the developer went into liquidation and administrators were appointed. In January 2011, James received a letter telling him that he would not be receiving any money back in relation to his investment.

James is able to claim negligible value relief. He is deemed to have sold the properties for their current value (zero) in January 2011 when they became of negligible value. The relief is computed as follows.

James can make a claim for negligible value relief. He is treated as making a capital loss of £43,700.

Making the Claim

Relief for assets that become of negligible value is not given automatically and must be claimed. A claim can be made either on the self-assessment return by writing to HMRC giving details of the claim.

When the claim is made, the claimant can specify an earlier time in the two previous tax years at which the deemed disposal should be treated as occurring. The condition that the asset must have become of negligible value whilst owned by the claimant must also have been met at that earlier time.

In the above example, were James to make the claim in 2011/12, he could specify that the asset became of negligible value in January 2011 (2010/11) when it was confirmed he would not receive anything from the liquidators. The loss is treated as occurring in the tax year in which the relief is claimed unless an earlier year is specified.

Where the relief is claimed through the tax return in respect of an asset that has become of negligible value, it is necessary to put an `X’ in box 34 to indicate that a claim or election is being made in relation to property and other assets.

Details of the claim, including the date on which the asset is being treated as sold (for example January 2011 in the above example if the claim is made in the 2010/11 tax return) should be entered in box 36, which provides space for the provision of other information. A computation of the loss should also be provided.

Where the loss is made for an earlier tax year, this can be done either by writing to HMRC or by amending the tax return for the year in question.

Married Couples and Civil Partners

Under the capital gains tax (CGT) rules, disposals between spouses and civil partners are deemed to be on a ‘no gain, no loss’ basis. The rules also allow a negligible value claim to be made where an asset acquired as part of a no gain no loss disposal is of negligible value, provided that any other disposal between the time when the asset became of negligible value and the no gain no loss disposal by which the claimant acquired it was also on a no gain no loss basis.

A no gain no loss basis is one where the proceeds are deemed to be such that the disposal generates neither a loss nor a gain (i.e. the deemed proceeds are equal to allowable costs).

This can be useful from a tax planning perspective, if, for example, one spouse owns an asset that has become of negligible value and the other has a capital gain, which could be used to mop up the loss.

For example, assume in the above example that James’ wife has sold a valuable painting realising a gain of £60,000. If James were to transfer the property to her on a no gain no loss basis, she could make the negligible value claim and set the loss of £43,700 against the gain on the painting. This would utilise the loss earlier, giving effect to the relief.

Relief Dependent on Gains

Whilst it is infinitely preferable to make a gain than a loss, the availability of relief allows 18% or 28% of the loss to be recovered in time (depending on the rate at which the claimant pays capital gains tax). However, relief is dependent on the availability of gains against which to set the loss and in the absence of sufficient gains it may be some time before the relief is released.

Further Information

Guidance on making negligible value claims can be found in HMRC Helpsheet 286, which is available on the HMRC website at (link here).

Practical Tip 

Consider a ‘no gain no loss’ disposal to a spouse or civil partner where this will allow earlier relief for the loss against gains realised by the spouse or civil partner.

By Sarah Bradford