Consider a negligible value claim
20th September 2022
Posted in Articles by Andrew Marr
The issue
In cases where an asset is lost, destroyed or becomes of ‘negligible value’ it is possible to claim a loss in respect of the asset without actually disposing of it. If a ‘negligible value’ claim is successfully made, then the asset is treated as being sold and reacquired at its market value.
Example
James convinces HMRC that shares that he has in a property development company are worth nothing. He acquired the shares for £50,000 and is treated as selling and reacquiring the shares for £0. Miraculously an oil well is discovered in the grounds of one of the properties and Shell then buys the company for £10m (of which James receives £1m). James will then be treated as making a gain of £1m by reference to his £0 tax base cost.
What is negligible?
Unfortunately, HMRC take this to mean ‘next to nothing’ and so making a valid claim may be harder than you think. For example, if a £5m investment goes down to a value of £1,000 HMRC are likely to take the view that this is not a negligible value – even though the current value is a tiny percentage of acquisition.
‘Becoming’ negligible?
HMRC do sometimes reject negligible value claims on the basis that the assets have not ‘become’ negligible. This can be the case where an investor injects capital into a failing company. The investor will argue that of course the shares had value or else he wouldn’t have made the investment, while HMRC argues that the balance sheet was always insolvent and so the shares always had a negligible value. This is a difficult area to negotiate.
Retrospective claim
Any claim made within two years from the beginning of a tax year can apply to that tax year as long as the asset was owned in the earlier tax year and was of negligible value.
HMRC lists
HMRC publishes a list of shares that it considers to be of negligible value (Please see link below).
https://www.gov.uk/guidance/negligible-value-agreements
A claim will not be appropriate if a company has been dissolved but in that case a capital loss can be claimed because the asset has been lost or destroyed.
Forbes Dawson view
Negligible value claims are a useful mechanism to trigger losses in respect of assets that the owner has ‘mentally written off’. Often the losses of such a claim will be used to relieve capital gains made in respect of other assets. Because there can often be doubt over whether an asset is of negligible value or has ‘become’ of negligible value then it may make sense to trigger a ‘conventional’ capital loss by disposing of an asset to a third party (although in the above example James would have been very unhappy if he had done this!). This will limit the risk of the claim being successfully challenged by HMRC which would have the effect of increasing the quantum of taxable gains.
