Business

Tax Corner: If the company you invested in is in liquidation, all may not be lost

Even if the company you have invested in falls is being liquidated, you may still be able to claim tax relief, writes Paddy Harty. (Olivier Le Moal/Getty Images/iStockphoto)

QUESTION: Many years ago I purchased shares in a new trading company. I have now received a notice that the company is in liquidation, and I am unlikely to recover anything? Can I claim any tax relief?

ANSWER: The short answer is yes. There are potentially two types of tax relief available to you.

Firstly, if you acquired the shares via a share subscription then you should be able to offset the loss of investment against your income of the current and/or preceding year detailing which year you are claiming relief for first.

You cannot restrict the loss relief such that you do not waste your personal allowance, once claimed, the loss must be offset in full against income. This relief against income is a valuable tax relief and is given via s131 ITA 2007.

If you acquired the shares other than by subscription, then the relief against income is not available to you however you can claim relief against capital gains.

To be able to claim s131 relief against income, there are three important conditions.

The first one is that the company must be a trading company (not an investment company) and you have confirmed this condition applies in your case. The second condition is that you must have subscribed for the shares and finally you must have disposed of the shares. A negligible value claim is a deemed disposal of the shares.

The trading company requirement is essential to be able to claim the relief and this requirement carries detailed conditions all of which must be met. For instance, the company must have been an unquoted company when you acquired the shares with no arrangements in place for it to become quoted.

Additionally, the company’s gross assets must have been lower than £7m before you subscribed for the shares and not more than £8m afterwards.

There is a time limit to when you can claim s131 relief which is not later than 31 January following the filing deadline for the tax year in which the loss is claimed – e.g. 31 January 2027 for a loss that arises in the 2024/25 tax year.

I have also assumed that the shares which you acquired did not attract EIS relief. If you did obtain EIS relief on the investment, then the loss available for relief is restricted by the income tax relief already given to you.

Finally, any claim to offset the capital loss against income of the same or preceding year will be restricted to a level equivalent to the greater of £50,000 or 25% of your taxable income in each year and any loss remaining unrelieved can only be carried forward and offset against future capital gains.

Being able to claim relief under s131 can in some instances treble the tax relief achievable on a lost investment when measured against just being able to offset the loss against a capital gain.

Higher and additional rate taxpayers pay capital gains tax at 20% whereas they pay income tax at 40%/45%.

If the loss claim reduces their taxable income below £100k then they also recover their personal allowance – an equivalent tax saving of 62%!

Paddy Harty.
Paddy Harty. Paddy Harty.

Paddy Harty (p.harty@fpmaab.com) is partner at FPM Accountants (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.