Q- A client has recently sold an asset, for what he believes to be the market value, to his sister-in-law. A capital loss has arisen and he would like to know how he could use this loss.
A- The first thing to be aware of when making a disposal of an asset to a connected person is that TCGA1992 s18 deems it to be a transaction made for a consideration equal to open market value, regardless of the actual proceeds.
The question then is who is a connected person and which relatives are included? The definition of this term is found within TCG1992 s286 – they are certain relatives, trustees, partners, and companies. As your client’s disposal was to his sister-in-law, we shall concentrate
on the definition of relatives. TCGA1992 s 286 (2) states that a person is connected with an individual if that person is the individual’s spouse or civil partner, a relative of the individual, the spouse or civil partner of a relative of the individual, a relative of the individual’s spouse or civil partner, or the spouse or civil partner of a relative of the individual’s spouse or civil partner. The relatives taken into account in this context are brothers, sisters, ancestor or lineal descendants. our client is therefore connected to his sister-in-law and the proceeds would be deemed market value if that figure had not been paid.
TGCA1992 s18(3) goes on to state that any loss arising on the disposal is only available for offset against any chargeable gains arising on some other disposal to the same person at a time whilst both persons are still connected in some capacity.
This restriction does not apply to the disposal of an asset by way of gift where the asset, together with any income derived from it, is primarily applicable for educational, cultural or recreational purposes and the persons benefiting from the gift are members of the association for whose benefit the gift is made and most of them are not connected persons (TCGA 1992, s. 18(4)).
Under self-assessment, a loss must be notified to HMRC (TCGA 1992, s. 16(2A)). This is normally done by including it in their personal Tax Return for the period concerned, but a capital loss may be notified at any time provided it is within four years from the end of the tax year of assessment.