Capital Loss Election

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10 November 2009

Key points

  • Foreign losses since April 2008 have become allowable for the first time.
  • But, if you're claiming the remittance basis, you need to make a separate claim for this at the same time, otherwise you may be out of time. There are pros and cons of this.
  • The tax return is badly designed. You need to know how and where to make this claim.
  • You'll need to quantify and identify your foreign losses.
  • If you don't do this on this year's tax return you may have lost the opportunity.

Finance Act 2008

The Finance Act 2008 introduced rules for the first time enabling a non-UK domiciled person to claim relief for losses realised on non-UK situated assets.

These rules matter to you if you are:

  • UK resident but non-UK domiciled and
  • making a claim to be taxed on the remittance basis in the 2008/09 UK tax year.

If you are UK resident but non-UK domiciled and you are not making a claim to be taxed on the remittance basis in the 2008/09 UK tax year, it is still worth reading on as you may decide to make a claim to be taxed on the remittance basis in a future year.

What are the rules?

If you don't claim the remittance basis

If a non-UK domiciled person does not make a claim to be taxed on the remittance basis in the year in which the non-UK situated losses accrue and has not made such a claim to be taxed on the remittance basis in any earlier UK tax year starting with the 2008/09 UK tax year, the losses accruing on such non-UK situated assets will be fully relievable.

If you do claim the remittance basis

In the first tax year starting with the 2008/09 UK tax year in which a non-UK domiciled person does make a claim to be taxed on the remittance basis the non-UK domiciled person has a once only irrevocable right of election as to whether his or her losses on non-UK situated assets will be relievable in future (referred to as a "foreign loss election").

To elect or not to elect?

If you don't make the foreign loss election

If the non-UK domiciled person decides not to make a foreign loss election his losses on non-UK situated assets for that and all future years are not allowable. This is so even in relation to future years in which the non-UK domiciled person does not make a claim to be taxed on the remittance basis.

If you do make the foreign loss election

If the non-UK domiciled person decides to make a foreign loss election, both UK and foreign losses are deductible. However, in tax years in which the non-UK domiciliary is a remittance basis user, special rules apply to determine the order in which losses are to be utilised. These special ordering rules apply to losses on UK situated assets as well as to losses on foreign situated assets and to current year losses as well as to unused brought forward losses. In general terms, the special ordering rules mean that losses are set against gains on non-UK situated assets before being set against gains on UK situated assets. This is the case even if the gains on the non-UK situated assets are not remitted to the UK by the non-UK domiciled person and are therefore not chargeable.

What decision do you need to make?

In light of the above it is very important that all non-UK domiciled persons who are making a claim for the remittance basis of taxation to apply in the 2008/09 UK tax year also consider very carefully whether they should also make a foreign loss election.

It will not always be a straightforward decision whether a foreign loss election should be made. Much depends on whether the non-UK domiciled person believes they will realise losses on UK situated assets or non-UK situated assets in the future. The main difficulty with this is that many non-UK domiciled persons will not know what losses they are likely to realise in the future and therefore deciding whether to make a foreign loss election will to some extent be based on guess work.

How do I make a foreign loss election?

If you decide to make a foreign loss election, it needs to be made in the white space of the capital gains tax pages of your 2008/09 UK tax return. This is not immediately apparent from the tax return!

Further, in order for losses to be relievable you need to claim the losses in your tax return (this can be done by filling in the "Capital gains summary pages"). Losses must be claimed within five years and ten months of the end of the tax year in which they are made so, for example, the latest date for claiming 2008/09 losses is 31 January 2015.

Therefore, when deciding whether to make a foreign loss election, it is important to be aware that if you do make an election you will need to disclose both foreign gains and losses to HMRC in order to obtain any relief for the losses you realise. If a foreign loss election is made, the record keeping required from 6 April 2008 is onerous – you will need to keep careful records of all losses (including the year in which they accrue) and of all gains (including gains realised on non-UK situated assets which are not remitted in the year they are realised so that if they are remitted at a later date you can determine whether there is any UK tax liability).

What should you do next?

It is important to remember that this is a once only right of election – if you do not make an election in the first year in which you claim the remittance basis (starting with the 2008/09 UK tax year), you will not be able to change your mind at a later date.

We cannot give general advice as to whether a non-UK domiciled person should make a foreign loss election as making a foreign loss election could increase or decrease your UK tax liabilities depending on your specific circumstances. Therefore, if you are unsure whether you should make a foreign loss election and you would like advice on how best to proceed in relation to your personal situation, please do not hesitate to contact us.

For further guidance on how the changes will affect you please contact either - John Barnett by e-mail or telephone +44(0) 117 902 2753; Beatrice Puoti by e-mail or telephone +44(0) 117 902 2765; Suzanna Harvey by e-mail or telephone +44(0) 117 902 7757.

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