Clause 47 - Use of trading losses against chargeable gains
Finance Bill
4:30 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 12, in page 32, line 19, leave out from 'relief)' to end of line 21 and insert—
'for ''disregarding section 3(1) of the Taxation of Chargeable Gains Act 1992 and the effect of this section'' substitute ''disregarding the effect of this section and either section 2A (taper relief) or section 3(1) (annual exempt amount) of the Taxation of Chargeable Gains Act 1992 as the person elects for the year of assessment in question.''.'.
The clause is intended to allow individuals to benefit from both taper relief and trading losses in the same year. The points that I shall make may be slightly convoluted.
As we understand the clause, the choice that will be presented to people for the early-stage operations of disposing of business assets could, unintentionally, be unattractive. Under section 2 of the Taxation of Chargeable Gains Act 1992, taper relief is given to reduce capital gains on business assets. It works to reduce taxable gains through a taper that depends on the length of the ownership of the business asset. It is available if the total chargeable gains for the year exceed current-year and brought-forward capital losses and the taper is applied to the net gain after deducting those capital losses. Section 72 of the Finance Act 1991 allows individuals to set trading losses against capital gains by treating the maximum amount of loss as a capital loss. The maximum amount is currently the net capital gain after taper relief but before the annual exemption. It should be noted that
as section 72 of the 1991 Act treats a trading loss as a capital loss, taper relief is applied to the net gain after setting off the trading loss.
The interaction of the two measures seems to mean that an individual could have trading losses in excess of their gross capital gains but, because of the way in which the taper works, could not reduce their capital gains to nil. The Bill increases the maximum amount of trading loss that can be set against the capital gain to the gross gain before taper relief. That in turn allows individuals with trading losses in excess of their capital gains to reduce the gains to nil. It also means that the benefit of taper relief is lost. That could penalise sole traders who need to realise funds by selling a business asset and use the cash raised to turn the unprofitable business around. The tax saved by each £10,000 of trading loss used in this way is £1,000 for assets held for more than two years, but £4,000 of tax could be saved if the loss were used against trading income.
The amendment would give taxpayers the option to elect to lose either taper relief or the annual allowance. That may sound an odd idea, but it might force the Government to explain why taxpayers must lose both. Although it would be relevant only in specific circumstances, the provision is a stealth tax nasty, although I believe that it was intended to be helpful. The Institute of Directors and the Chartered Institute of Taxation have also noted the anomaly.