Negligible Value Claims: How to Claim Tax Relief on Worthless Shares in a Private Company

Investing in a private company does not always work out as planned.

A business may fail, cease trading or simply reach the point where its shares are effectively worthless. While nobody wants an investment to fail, there can at least be a valuable tax consequence. A negligible value claim can, in the right circumstances, allow an investor to crystallise the loss for tax purposes even though they still legally own the shares.

What is a negligible value claim?

Normally, a capital loss on shares arises when you dispose of them. That creates an obvious problem with shares in a failed private company: there may be nobody willing to buy them. The negligible value rules provide a solution. Under Section 24 of the Taxation of Chargeable Gains Act 1992, an owner can make a claim where an asset has become of negligible value. If the claim is accepted, the investor is treated for tax purposes as though they had sold the shares and immediately reacquired them at their negligible value. The result will usually be a capital loss broadly equivalent to the original allowable cost of the investment. HMRC describes "negligible" as meaning worth next to nothing. There is no fixed percentage or mathematical test.

The shares must have lost their value

One important condition is that the shares must have become of negligible value while you owned them.You cannot, for example, acquire shares which are already effectively worthless and then make a negligible value claim. The shares also need to be of negligible value when the claim is made.For an unquoted company, demonstrating this can require rather more work than simply pointing to the absence of a quoted share price.Evidence might include the company's latest accounts, management accounts, statement of affairs, details of creditors, correspondence from liquidators or administrators, cessation of trade and information demonstrating that there is no realistic prospect of shareholders receiving anything from the company's assets or future activities.HMRC's guidance indicates that, where an unquoted company is not already in liquidation or receivership, it expects full and comprehensive information supporting the contention that the shares have become of negligible value.

Why does the timing matter?

A negligible value claim does not necessarily have to create the loss in the year in which the claim is submitted. Subject to the statutory conditions, it can be possible to specify an earlier date for the deemed disposal. The shares must have been of negligible value at that earlier date as well as satisfying the conditions when the claim is made.This can be particularly useful where an investor has gains against which the loss could be utilised. It also means that it is worth reviewing failed or distressed private-company investments as part of the annual tax-return process rather than simply leaving worthless shares sitting indefinitely on an investment schedule.

Could the loss be even more valuable?

There is another important point which is sometimes overlooked.

Certain losses on shares in qualifying trading companies can potentially qualify for Share Loss Relief. Where the relevant conditions are satisfied, the loss may be available against income rather than merely being treated as a capital loss. This can make a substantial difference to the value of the tax relief.

The rules are detailed and depend, amongst other things, upon the nature of the company and how the shares were acquired. Importantly, where Share Loss Relief relies upon the shares becoming of negligible value, the negligible value claim itself needs to be made: claiming Share Loss Relief alone is not sufficient.

An example

Suppose an individual subscribes £100,000 for shares in a private trading company. Several years later the business fails. It has substantial creditors, no realistic prospect of returning to profitability and no assets available for shareholders. The investor still owns the shares because there is no market for them.

Without the negligible value provisions, there is no conventional sale to trigger the loss.

A successful negligible value claim can create a deemed disposal, potentially crystallising a loss approaching the £100,000 originally invested, subject to the detailed tax rules and any previous relief obtained. The next question should then be: is this simply a capital loss, or does it qualify for Share Loss Relief against income?

Don't wait until the company disappears - there is a practical trap here.

Although HMRC states that there is no specific time limit for making the negligible value claim itself, the investor must still own the asset and the asset must still exist. Once a company has been dissolved and the shares have ceased to exist, it may be too late to make a negligible value claim, although the tax consequences of the shares actually ceasing to exist then need to be considered separately.

So where an unquoted investment has clearly failed, it is sensible to consider the tax position sooner rather than simply waiting for the company's eventual dissolution.

The lesson:

Tax planning naturally tends to concentrate on successful investments and the gains they have generated. Failed investments deserve attention too.If you have invested in an unquoted company which has ceased trading, entered insolvency proceedings or has otherwise lost substantially all of its value, it is worth reviewing:

• whether the shares have become of negligible value;
• when that happened;
• what evidence exists to support the valuation;
• the amount of the resulting allowable loss;
• whether that loss can be used against capital gains; and
• crucially, whether Share Loss Relief could allow the loss to be relieved against income instead.

A failed investment is never good news. But overlooking the available tax relief can make the financial outcome unnecessarily worse.