Capital Losses and Tax Deduction in the UK
Capital loss is a terminology applied to any person selling and buying an asset, whether in property or stock, among other investments. If you sell the asset at a lower price than what you bought it for, you incur capital losses.
The good news, however!! In the UK, you actually can use such capital losses and set them against other taxes.
Now, moving forward!!!! Let's look at how capital losses work…. how you can carry them forward in the best interests of deduction.
Capital Losses Tax: Are They Deductible?
Yes!!
Capital losses are tax-deductible in the UK. You do not pay a tax on the capital loss amount. Here, the set-off of capital losses against the capital gain is allowable as a deduction.
All these transactions and operations that incur losses in capital have to be properly documented, as these will have to be furnished when filing for tax or if asked for by HMRC.
Offsetting of Capital Losses Against Capital Gains
The main benefit of capital losses is to offset capital gains. There is no limit to the amount one can apply toward this goal.
It simply means:
All your capital losses, combined, can offset any capital gains. It will, in turn, help you fully benefit from the Capital Gains Tax-Free Allowance.
Capital Gains Tax-Free Allowance
It's the profit one could make from selling assets before having to start paying any Capital Gains Tax.
According to official resources, capital gains tax-free allowance was valued at £6,000 for the tax year 2023-24.
If:
Total gains < this threshold; you won’t pay capital gains tax.
Read more: UK Crypto Regulations 2024!
Carrying Forward the Capital Losses
If you make a capital loss more than the capital gains in a year, you do not lose that loss. You can carry it forward to subsequent financial years.
This way, you can set it off against future capital gains, thus reducing your tax bill in the future. This may be applied when you expect to make substantial gains in the future.
What is the time frame for carrying forward a capital loss?
Capital losses may be carried forward indefinitely in the UK. However, a person must keep proper records and report such losses to HMRC within four years from the end of the tax year in which those losses were born.
Failure to report within four years means losing the ability to use those losses against future gains.
Can Capital Losses Offset Dividend Income?
Capital losses cannot be used to offset income from dividends or any other form of income. They are specifically meant to offset capital gains.
Examples of Capital Losses:
Selling property, stocks, and other investments at lower prices than at purchase.
Getting Professional Help
Understanding the rules relating to capital losses and Capital Gains Tax can be very complex.
Our expert team at Crypto Accountants, including tax advisors, can help you review any available capital losses and tax deduction opportunities.
Final Notes!
Anybody investing in the UK needs to understand capital losses and how those can interact with your taxation.
Detailed record-keeping and knowledge of the rules will enable you to:
Use capital losses to your advantage
Reduce your overall tax liability
Make full use of the Capital Gains Tax-Free Allowance
If you are hesitant, professional advice will help you make the right financial decisions.