Stock Loss Relief for Income Tax and Corporation Tax

Who is likely to be affected

Individuals and investment companies who subscribe for newly issued shares in small and medium-sized unlisted commercial companies, where the shares are then sold at a loss.

General description of the measure

This measure expands the scope of share loss relief from income and corporate tax to apply to shares of companies doing business anywhere in the world and not just in the UK. A change will be made to reporting requirements so that HMRC can identify the tax residency of the company that issued the shares.

Political objective

This measure is designed to benefit individuals and investment companies, by widening the scope of the share loss relief so that it also applies to newly issued shares of small and medium-sized non-commercial companies. listed companies carrying on business outside the UK, and the shares are then disposed of by the shareholder for a loss.

Context of the measure

The European Commission issued a reasoned opinion on 24 January 2019. Amendments are underway to provide that equity loss relief applies to investments in companies resident outside the UK to ensure that this relief is compatible with the principle of free movement of capital.

On June 23, 2016, the EU referendum took place and the British people voted to leave the EU. Until exit day, the UK remains a full member of the EU and all rights and obligations of EU membership remain in force.

During this period, the government will continue to negotiate, implement and enforce EU legislation.

Detailed proposal

Effective date

This measure will come into force on January 24, 2019.

Current law

Relief from loss of income tax can be found in Section 131 of the Income Tax Act 2007. It applies when an individual subscribes for newly issued shares in a small and medium-sized unlisted commercial company, then disposes of these shares at a loss.

Relief for loss of shares from corporation tax can be found in Section 68 of the Corporation Tax Act 2010 onwards. It applies where an investment company is subscribing and largely reflects the requirements of the Income Tax Act 2007.

To benefit from the relief, the shares issued must be qualifying shares, either:

• shares to which relief from the Business Investment Scheme (EIS) is attributable (this only applies to individuals)
• shares of a qualifying commercial company

A company will be a qualifying commercial company if it fulfills 4 conditions at the relevant time. The relevant time varies depending on the condition. Basically, a company will be a commercial company if:

• he was engaged in a business activity that was not an excluded activity, for which there is an exhaustive list of activities
• its gross assets did not exceed a limit immediately before and immediately after subscription
• it was not listed
• it carried on business wholly or mainly in the United Kingdom

Relief is only due if the holder of the shares has disposed of them which has resulted in a deductible loss for the purposes of the Taxation of Taxable Gains Act 1992. Relief was granted for this loss deductible against income rather than against capital gains as would normally be the case.

Proposed revisions

Legislation will be introduced extending the relief to apply to shares of companies located anywhere in the world. An additional reporting requirement will be introduced for the applicant to tell HMRC the tax residency of the company that issued the shares.

Summary of impacts

Impact on Treasury (£m)

The final cost will be subject to review by the Office of Budget Responsibility and will be presented in the 2019 budget.

Economic impact

This measure is not expected to have significant macroeconomic implications.

Impact on individuals, households and families

This will only affect a small number of people who are currently subscribing to newly issued shares in companies doing business outside the UK. This measure will benefit such individuals, by extending the scope of share loss relief to apply to losses on shares of companies carrying on business outside the UK. This measure should not affect the formation, stability or breakdown of the family.

Equalities impacts

This measure is not expected to have an impact on groups sharing protected characteristics.

Impact on businesses, including civil society organizations

This measure will benefit a small number of investment companies which have subscribed to shares in companies carrying on business outside the United Kingdom and which sell these shares at a loss. This measure should have a negligible impact on investment companies.

One-time costs include familiarizing yourself with tax changes, deciding whether or not to claim the loss, determining the tax residency of the company that issued the shares, and reporting this information.

Investment firms will continue to claim the relief from HMRC as they currently do. There should be no ongoing charges. There is no impact on civil society organizations.

Operational impact (£m) (HMRC or other)

There will be HMRC costs to implement this change which are estimated to be around £0.5m, which covers both income tax changes and compliance costs.

Other impacts

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be reviewed by contacting the taxpayer groups concerned.

Additional tips

If you have any questions about this change, contact Jon-Paul Rosser by phone: 03000 551725 or email: jon-paul.rosser@hmrc.gov.uk.