The treatment of capital losses

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Capital losses

  1. Current year capital losses are set against current year capital gains in the same tax year.

  2. The set off is made to the maximum possible extent and cannot be restricted to avoid wasting the annual exemption.

  3. If there are insufficient gains to set off the capital losses in the year they arise, the unrelieved capital losses may be carried forward.

  4. The capital losses brought forward are offset after the deduction of the annual exemption and therefore do not waste the annual exemption.

  5. Any unrelieved capital losses brought forward are carried forward to the next year to be set off against capital gains.

Illustration:

Fiona and Jane made capital gains and capital losses for the years 2022/23 and 2023/24 as set out below:

Fiona Jane
2022/23
Capital gains 15,000 7,000
Capital losses 10,000 20,000
2023/24
Capital gains 17,500 16,200
Capital losses 5,200 2,000

Calculate the taxable gains for Fiona and Jane for both 2022/23 and 2023/24 and the amount of any losses carried forward at the end of 2023/24.

Solution:

Fiona 22/23 23/24
Capital gains £15,000 £17,500
Capital losses (£10,000) (£5,200)
Net capital gains/loss £5,000 £12,300
Annual exemption (£5,000) (£6,000)
Taxable gain Nil £6,300
Jane 22/23 23/24
Capital gains £7,000 16,200
Capital losses (£20,000) (2,000)
Net capital gains/loss (£13,000) will be carried forward against c. gains of 23/24 £14,200
Annual exemption Wasted (£6,000)
Capital losses brought forward (£8,200)
Taxable gain Nil Nil

Explanation:
Jane had a loss of 13,000 in 22/23 which was carried forward to 23/24.

After deducting the annual exemption in 23/24 £8,200 of the loss brought forward was used, therefore £4,800 is carried forward to 24/25.

Note that the current year losses must be set off to a maximum without any restriction and thus wastage of the annual exemption.

However, capital losses brought forward will only be offset if a gain remains after deduction of the annual exemption.

NotesQuizPaper examCBE