A time and a place

Capital gains tax (CGT) is broadly charged on the total chargeable gains in a tax year, after deducting any allowable capital losses accruing in that tax year and any unused losses brought forward (TCGA 1992, s 1(3)).

The capital loss accruing in a tax year is not allowable unless it is quantified and notified to HMRC (TCGA 1992, s 16(2A)). If HMRC has issued the individual (or trustees, or partners) with a notice to file a self-assessment return for the tax year, the loss must be quantified and claimed in the return (TMA 1970, ss 42(2), (3)). For taxpayers who are not registered for self-assessment, there is no specific form to claim capital losses. Claims not included in a return can be made (under TMA 1970, Sch 1A) in writing to HMRC.

The time limit for capital loss claims by individuals etc. is four years after the end of the relevant tax year (TMA 1970, s 43). However, there is an important exception for losses made before 5 April 1996. HMRC acknowledges that taxpayers can claim for such losses, by deducting them after any more recent losses (see www.gov.uk/capital-gains-tax/losses).

Has the loss been claimed?

As indicated, capital losses may be forgotten in the midst of time. Alternatively, a loss may have been claimed in an earlier tax return, but not mentioned in subsequent tax returns. If HMRC does not have a record of the capital loss being claimed, it may be difficult to establish the claim if the taxpayer (or agent) has not retained a copy of the earlier tax return.

In Goksu v Revenue and Customs [2022] UKFTT 213 (TC), In 1982, the appellant purchased a 15-year lease of a London property (‘Broadway’) and bought the freehold in 1985. In 1989, he bought a property in Stratford (‘The Grove’) for £1,313,794. Due to an economic downturn, the appellant sold The Grove on 27 August 1998 for £990,000. The appellant’s accountant at the time submitted a capital loss computation in 2000 as an amendment to the appellant’s tax return for 1998/99.

Subsequently, the appellant sold Broadway on 13 March 2015 for £1,380,000. The appellant (through a new accountant) prepared the appellant’s tax return for 2014/15. The original return had not included the loss on sale of The Grove. An amended return was submitted on 31 January 2017, which deducted the loss from selling The Grove from the gain on Broadway (and deducted expenses).

However, HMRC asserted that the appellant could not use the loss from 1998/99 to reduce his subsequent gain because he had not notified HMRC of that loss by 31 January 2005 (NB the time limit for notifying the loss at that time was within five years of 31 January next following the year of assessment to which it related). HMRC also imposed penalties on the basis that using the previous loss was a careless inaccuracy.

On appeal, the First-tier Tribunal (FTT) found on the evidence that the appellant notified HMRC of the loss relating to The Grove in 2000. As the FTT found in favour of the appellant on the capital loss claim issue, the FTT concluded that the penalty in respect of the inclusion of the loss on The Grove should be reduced to zero. The appellant’s appeal against HMRC’s amendment to his tax return for 2014/15 and related penalty for careless inaccuracy was allowed.

Record keeping

The normal record keeping requirement is for individuals to keep and preserve records for self-assessment return purposes for at least one year after 31 January following the end of the relevant tax year. This one-year period is extended to five years if the individual is carrying on a trade, profession or business (TMA 1970, s 12B).

This one-year record keeping requirement is potentially problematic, because some taxpayers might assume they can dispense with their records when that period has expired, notwithstanding the normal four-year time limit for making a capital loss claim.

For capital loss claims not included in a tax return, appropriate records must be kept and preserved until any HMRC enquiry into the claim (or an amendment) is completed or, if no enquiry is in progress, the day on which HMRC no longer has power to make such enquiries (TMA 1970, Sch 1A, para 2A(2)).

There is no statutory requirement to keep specific records relating to the capital asset. However, HMRC states (in its Compliance Handbook manual at CH14650) that records supporting the calculation of a capital gain or loss include documents relating to:

· ‘the disposal, for example contract for sale or lease, valuations

· the acquisition, for example contract for purchase or lease of the asset

· the cost of any improvements made to the asset during the period of ownership

· the calculation of the gain or loss, for example any valuations.’

If such records are not held and they cannot be replaced after they have been lost, stolen or destroyed, HMRC’s CGT guidance (at www.gov.uk/capital-gains-tax/losses) states that the records should be recreated, if possible. HMRC points out that if recreated records are used, it will be necessary to state where the figures are estimated (if the individual wants HMRC to accept the figures as final) or provisional (and update them later with the actual figures).

Conclusion

In Goksu (above), HMRC did not dispute that the appellant had made a loss in 1998 but contended that the time limit for claiming it had expired. Fortunately, the FTT was able to find that the appellant (through his agent at the time) had completed a capital loss computation and submitted it in 2000 as an amendment to his tax return for 1998/99.

Of course, every case is different; other claimants may not be so fortunate. Problems should be averted by ensuring that the capital loss is quantified and claimed within the statutory time limit, and that contemporaneous records are maintained to substantiate the loss claimed.

Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is General Editor and a co-author of Tax Planning (Bloomsbury Professional).

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