Those who invest in the shares of private companies have generally been able to reassure themselves that, should the worst happen and the shares become worthless, they can at least make a 'negligible value' claim. This leads to the shares being treated as if they had been sold and re-acquired at the much diminished value, so that a loss can be claimed for Capital Gains Tax (CGT) purposes that is available to set against future (or same-year) chargeable gains.
However, a recent tax case sounds a warning bell for potential investors in such companies. It involved an investor who bought shares at par value in a company in two tranches, totalling nearly £½ million, between April 2002 and December 2003. Due to a series of unfortunate circumstances, the business lost money consistently, with the effect that it went into administration in June 2004 and was liquidated in April 2006, with no return of funds to the shareholders.
The investor contended that the shares had become of negligible value by 6 April 2004 and claimed for the attendant CGT loss. The legislation allowing this relief requires that value ascribed to the shares subscribed for must be based (no matter what the price paid) on ‘their open market value, meaning the price which would be agreed between a hypothetical willing seller and a hypothetical willing purchaser in possession of all the information a prudent prospective purchaser would reasonably require, and upon the footing that neither party has a special interest'.
HM Revenue and Customs (HMRC) disputed the investor’s claim on the basis that, in their view, the shares were already valueless when subscribed to, using the above definition. Valuing the shares at £610 in total, HMRC sought to restrict the claim to that sum and were successful in persuading the Tribunal that their valuation was correct.
In such claims, the Tribunal noted, ‘the burden of showing that he is entitled to the relief he claims lies on the taxpayer’ and in this case, he failed to do so.
HMRC's website contains a guide to making negligible value claims.