Capital Gains Tax (CGT) applies when you sell certain assets like shares or second properties at a profit. However, if you were to sell an asset at a loss, you are also able to report capital losses which can then be used to help you reduce your future CGT tax liability.
A capital loss occurs when you sell an asset for less than you paid for it. While losses cannot be deducted from your income, they can be offset against capital gains made in the same tax year. If your losses exceed your gains in a given tax year, you can carry them forward to offset against future gains—provided you report them to HMRC. It is important to note that you do not have to report the loss straight away as you can claim losses up to 4 years after the end of the tax year that you disposed of the asset.
To claim a capital loss, losses must be reported to HMRC, usually through your Self-Assessment tax return or by writing to them if you’re not filing one. Therefore, it may be helpful to keep detailed records of the transaction, including acquisition and disposal dates, purchase price, sale price, and associated costs like legal fees or broker charges; as well as reviewing any capital sales over the past few years where you may have realised a loss, but are yet to claim it.
Following the recent increase to CGT rates, as well as the CGT allowance now standing at only £3,000 per annum, ensuring that you have claimed any realised capital losses can prove to be a very useful and effective way to manage CGT liabilities in the future.
