Can you utilise a loss from years ago to reduce capital gains tax?
As a UK accountant, one of the questions we often receive from clients is whether a loss from previous years can be used to offset capital gains tax on a new sale. The short answer is yes, it is possible to use losses from previous years to reduce capital gains tax on a new sale.
Capital losses can be used to offset capital gains. If you have previously incurred a capital loss on the sale of a capital asset, such as a property, you must have reported it on your tax return or through a capital gains tax return in the year in which the loss was incurred. This creates a record of the loss with HM Revenue & Customs (HMRC), which can be used to offset capital gains on future sales of capital assets. This loss has no time restriction and carries forward indefinitely.
When selling an asset, it is important to calculate the taxable gain or loss. This can be done by subtracting the cost of the asset from the sale price, and then deducting the annual exempt amount. It is worth noting the annual exempt amount has decreased to £6,000 (22/23: £12,300) from 6th April 2023.
If the result is a gain, capital gains tax may be due. However, if there are losses from previous years, these can be used to reduce the taxable gain and the amount of capital gains tax due.
It is important to note that you can only offset capital losses against other capital gains in the same asset class. For example, capital losses on property cannot be offset against capital gains on share disposals. An example calculation can be found below.
| Property purchase price | 350,000.00 |
| Property sale price | 500,000.00 |
| Capital gain | 150,000.00 |
| Annual exempt amount | – 6,000.00 |
| Capital property losses b/f | – 116,000.00 |
| Capital stocks losses b/f (not allowable) | – 10,000.00 |
| Total taxable gain | 28,000.00 |
In the calculation above, the capital losses on stocks cannot be offset against the capital gain on the property as this is considered a different class of asset. To summarise, losses from previous years can be used to reduce capital gains tax on a new sale of a property. It is important to keep track of the losses and ensure that they recorded at the time of the loss and that they are carried forward correctly. It is also important to note that losses can only be used to offset capital gains and not other types of income and can only be used to offset gains in the same asset class.
If you would like some assistance or advice on regarding historic losses, contact us today!
Please get in touch on 01273 441187 or book a discovery call with one of our expert accountants.
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