Losses incurred on the disposal of an asset can be set against future profits on other investments for Capital Gains Tax (CGT) purposes. As a First-tier Tribunal (FTT) ruling showed, however, behind that simple statement lie layers of complexity.
The case concerned a commercial property investor who purchased a property in 1989 for more than £1.3 million. A combination of high interest rates and a property recession, however, proved ruinous and he was constrained to sell the property in 1998 for £990,000. For CGT purposes, he sought to set that loss against the handsome profit he made on the sale of another property in 2015.
That deduction was, however, disallowed by HM Revenue and Customs (HMRC) on the basis that capital losses can only be carried forward to set against future gains if they are notified to HMRC within five years of the 31 January in the year following the year of assessment in which the loss arose. HMRC also issued the investor with a penalty, asserting that his deduction claim was carelessly inaccurate.
Upholding his challenge to those decisions, the FTT noted that he was not a meticulous record-keeper. He had only a partial understanding of complex tax matters and was someone who needed a lot of assistance with them. Although the document trail had long since gone cold, the FTT was satisfied that his then accountant had notified HMRC of his loss within the requisite time limit.
He was therefore entitled to deduct a loss of £412,126 from his CGT liability arising on the sale of the other property. The inaccuracy penalty was also overturned. A further penalty in respect of admittedly careless overstatement of expenses arising from the sale of the other property was confirmed in the amount of £6,627.
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