Share Loss Relief Against Income UK

When shares in a company become worthless, most investors assume the resulting loss can only be set against capital gains. That is the default position under capital gains tax. But where the right conditions are met, a more valuable option is available — setting the loss against income instead. This is share loss relief under ITA 2007, section 131, and it can produce a significantly better tax outcome than a standard capital loss. Our tax advisors at Tax Accountant work with investors, directors and shareholders on capital losses and tax relief, and share loss relief is one of the most valuable — and most frequently misunderstood — reliefs available to individuals who have invested in companies that have failed.

What Is Share Loss Relief?

Share loss relief allows an individual to set a loss on qualifying shares against income of the same tax year or the previous tax year. This contrasts sharply with the default treatment of capital losses. Under TCGA 1992, sections 1E and 16, capital losses can only be set against chargeable gains of the same tax year or carried forward to future years. They cannot be carried back and they cannot be set against income.

The ability to set a loss against income — including employment income, self-employment income, rental income or any other income — makes share loss relief considerably more powerful than a standard capital loss. A capital loss sitting unused because you have no gains to absorb it may take years to produce any benefit. A share loss relief claim can generate an immediate income tax repayment in the year of claim or a reduction in the previous year’s tax bill.

The relief is claimed under ITA 2007, section 131. It applies to losses on the disposal or deemed disposal of qualifying shares in qualifying companies. HMRC’s guidance on share loss relief sets out the conditions in full.

What Conditions Must Be Met?

The conditions for share loss relief are precise. All of them must be satisfied. Missing any one of them means the loss falls back to the default capital loss treatment.

The first condition concerns the company itself. It must be a qualifying trading company or the holding company of a qualifying trading group at a relevant time. The trade must have been carried on commercially with a view to profit. Investment companies, property companies and businesses that mainly hold assets rather than trade do not qualify. The test looks at what the company actually does — not simply what it was incorporated to do.

The second condition concerns the nature of the shares. They must be ordinary shares. Preference shares, loan notes and debt instruments do not qualify. The shares must also have been subscribed for by the claimant — meaning the claimant must have been the original subscriber, taking the shares directly from the company in exchange for cash or qualifying non-cash consideration. This subscription requirement is critical and it is where many claims fail.

The third condition concerns how the loss arises. The loss must arise on an actual disposal or a deemed disposal. A negligible value claim under TCGA 1992, section 24 creates a deemed disposal and is one of the most common ways of bringing a loss into existence for the purposes of claiming share loss relief. Without an actual or deemed disposal, no loss exists to claim.

The fourth condition is that the claim must be made within the time limit. A share loss relief claim must be made within one year of the 31 January following the end of the tax year in which the loss arises. For a loss arising in 2024/25, the deadline is 31 January 2027. Missing this deadline extinguishes the right to claim.

What Is the Subscription Requirement and Why Does It Matter So Much?

The subscription requirement is the condition that trips up the most claims. To qualify for share loss relief, the claimant must have subscribed for the shares. Subscribed means taking the shares directly from the company, as part of an original issue, in exchange for cash or qualifying consideration.

Shares acquired by purchasing them from another shareholder on the secondary market do not qualify. Shares received as a gift do not qualify. Shares acquired as part of a share split or bonus issue may not qualify. Shares transferred as part of a salary or employee share scheme arrangement may not qualify depending on how the acquisition was structured.

This matters enormously in practice. An investor who buys shares in a start-up from a founding shareholder — rather than subscribing directly in a funding round — does not meet the subscription condition. The loss on those shares is a capital loss only. An investor who subscribes for shares in a seed funding round, paying cash directly to the company in exchange for new shares, does meet the condition — provided the other requirements are also satisfied.

The subscription requirement also catches out a specific and common scenario involving director loans. Where a director has advanced money to a company by way of a loan and that loan is subsequently capitalised into shares, the shares are treated as acquired in exchange for the loan rather than subscribed for in cash. The subscription condition is not met. If the company later fails and a negligible value claim is made on those shares, the resulting loss is a capital loss only. It cannot be relieved against income. Our business capital gains tax service covers this scenario regularly.

How Does the Relief Work in Practice?

Where all conditions are met, the claimant makes a formal claim to set the loss against income. The claim specifies whether the loss is to be set against income of the current tax year, the previous tax year or both. Where the loss is large enough to cover income in both years, the claimant must specify which year takes priority. HMRC applies the relief in the order the claimant directs.

The relief reduces the claimant’s income for the year in question, reducing or eliminating the income tax liability for that year. Where the loss exceeds the income of the claim year, the excess reverts to a capital loss and is carried forward in the normal way. It cannot be carried back to an earlier year for capital gains purposes once the income relief route has been exhausted.

The relief is most valuable where the claimant has significant income in the year of the loss or the previous year. A higher rate taxpayer with £100,000 of employment income in 2024/25 who makes a valid share loss relief claim of £60,000 on qualifying shares reduces their taxable income for that year to £40,000 — saving up to £24,000 in income tax at 40%, potentially including a repayment of tax already paid through PAYE.

The £50,000 and 25% Cap

Share loss relief is subject to a restriction where the company whose shares have become worthless is not an Enterprise Investment Scheme or Seed Enterprise Investment Scheme company. For non-EIS, non-SEIS shares, the amount of share loss relief that can be set against income is capped at the greater of £50,000 or 25% of the claimant’s adjusted total income for the year.

This cap limits the benefit of share loss relief for very large losses on non-EIS qualifying shares. Where a loss of £200,000 arises and the claimant’s adjusted total income is £80,000, the cap is 25% of £80,000 — which is £20,000. Only £20,000 of the loss can be set against income. The remaining £180,000 becomes a capital loss carried forward. This restriction does not apply where the shares qualified for EIS or SEIS relief, which is one of the reasons those schemes are particularly attractive for early-stage investment.

EIS and SEIS Shares: Enhanced Relief

Where shares qualified for Enterprise Investment Scheme or Seed Enterprise Investment Scheme relief at the time of subscription, the cap described above does not apply. Loss relief against income is available without restriction on the full amount of the loss.

EIS and SEIS also offer additional features that interact with share loss relief. Where EIS income tax relief was originally claimed on the shares and the shares are subsequently disposed of at a loss, the loss eligible for income relief is reduced by the amount of the EIS relief already given. This prevents double relief on the same investment. HMRC’s guidance on EIS loss relief explains how the interaction works. The ICAEW has published detailed technical commentary on EIS and SEIS planning for investors and advisers dealing with these schemes.

Anti-Avoidance Provisions

Share loss relief is subject to anti-avoidance rules. Relief is restricted or denied where arrangements exist that have as one of their main purposes the securing of a tax advantage through the relief. HMRC looks carefully at transactions where shares are subscribed and a loss is claimed shortly afterwards, particularly where the subscription and the failure of the company appear to have been anticipated.

The anti-avoidance rules are broadly drafted. They do not require the arrangements to have been designed primarily for tax avoidance — a main purpose is sufficient. Where a subscription is made with an awareness that loss relief will be claimed and the commercial rationale for the investment is weak, HMRC may challenge the claim. Our team reviews the commercial substance of any investment before advising on a share loss relief claim.

When Is a Negligible Value Claim the Right Approach?

Where shares have become worthless but no actual disposal has taken place — because the company has not yet been formally dissolved — a negligible value claim under TCGA 1992, section 24 creates the deemed disposal needed to bring the loss into existence. Without a disposal, there is no loss to claim.

Making the negligible value claim at the right time is important. The claim can specify a date up to two years before the start of the tax year in which the claim is made, provided the shares were of negligible value at that earlier date. This backdating facility allows the loss to be allocated to an earlier tax year, which can be useful where the claimant had higher income in that year.

Once the company is formally dissolved, the asset ceases to exist and the disposal falls under TCGA 1992, section 24(1) rather than a negligible value claim. The backdating facility under section 24(2)(b) is no longer available. Making the negligible value claim before dissolution preserves the backdating option. Waiting until after dissolution removes it.

Our personal capital gains tax service covers the interaction between negligible value claims and share loss relief as a combined planning exercise for clients whose investments have failed.

How Our Tax Advisors Can Help

Share loss relief requires careful analysis of whether all conditions are met before a claim is made. The subscription requirement, the company qualifying condition, the timing of the negligible value claim, the interaction with EIS relief and the 25% cap all need to be assessed for each specific situation. Getting one element wrong means the more valuable income relief is unavailable and the loss falls back to capital treatment.

Our team works with investors, company directors and shareholders on share loss relief claims as part of our personal capital gains tax and personal tax services. We review the subscription history, assess the qualifying company conditions, time the negligible value claim correctly and prepare the formal relief claim for submission to HMRC.

If you hold shares in a company that has failed or is failing — or if you subscribed for shares that have become worthless and have not yet made any claim — get in touch with our team as soon as possible. The time limits on these claims are strict and the earlier you act, the more options remain available.