Can You Offset Capital Losses Against Income Tax UK?

Capital losses are a part of investing and asset ownership. When you sell or dispose of an asset for less than you paid, you may make a capital loss. While capital losses can reduce your tax bill, many people ask whether these losses can be used to offset income tax in the UK.

In most cases, the answer is no – but there are exceptions and ways to make the most of your capital losses. This guide explains how capital losses work, when they apply, and how you can use them to reduce your tax burden.

What Is a Capital Loss?

A capital loss occurs when you sell an asset (such as property, shares, or crypto) for less than its acquisition cost, including any costs of purchase, sale, and allowable improvements.

For example, if you buy shares for £10,000 and later sell them for £6,000, your capital loss is £4,000.

These losses are not wasted. You can use them to reduce future Capital Gains Tax (CGT) liabilities.

When Do Capital Losses Arise?

Capital losses can arise from:

• Selling property, shares, or investments at a loss

• Assets being destroyed or becoming worthless

• Disposing of assets for a lower value than what you paid

You must claim the loss within four years of the end of the tax year in which the loss occurred, either through your Self Assessment tax return or directly with HMRC.

Can You Offset Capital Losses Against Income Tax?

In general, capital losses cannot be used to offset income tax in the UK. They can only be used to offset capital gains in the same or future tax years.

However, there is a limited exception:

Share Loss Relief for Unquoted Trading Companies

If you sell shares in a qualifying unquoted trading company at a loss, or if they become worthless, you may be able to claim Share Loss Relief.

This relief allows you to offset the capital loss against your income, rather than capital gains, which can be more valuable for tax purposes.

To qualify, the shares must have been:

• Subscribed for (not bought from another shareholder)

• In a company carrying on a trade (not an investment company)

• Not listed on a recognised stock exchange

The claim must be made within four years of the end of the tax year in which the loss occurred.

When Can You Offset Capital Losses?

In most cases, capital losses are offset as follows:

• First, against any capital gains in the same tax year

• If not fully used, carried forward to offset gains in future years

You cannot use capital losses to increase a capital loss in a tax year where there are no gains.

You must also report the loss to HMRC, even if you’re not using it right away, in order to carry it forward.

Example of Capital Loss Carry Forward

You sell shares in 2023–24 and make a £10,000 capital loss. You have no gains that year. You report the loss to HMRC on your tax return.

In 2024–25, you make a £15,000 capital gain. You can use the £10,000 loss from the previous year to reduce the gain to £5,000. After applying your £3,000 CGT allowance, you’ll only pay tax on £2,000.

Assets That Are Lost or Destroyed

If an asset is lost, destroyed or becomes worthless (e.g. fire, theft, natural disaster), you may still claim a capital loss if you received no compensation or less than the asset’s value.

This also applies to shares that become of negligible value, such as in a company that collapses. You can make a negligible value claim, which is treated as if you sold the shares for nothing and then reacquired them, allowing you to crystallise the loss.

Optimising Relief and Tax Planning

To make the most of capital loss rules:

• Track your losses and report them promptly

• Use gains and losses in the same tax year where possible

• Consider selling underperforming investments to trigger a useful loss

• Make use of Share Loss Relief if investing in small or startup companies

• Combine capital losses with annual CGT allowances and income thresholds to minimise your tax exposure

If your financial affairs are complex or involve business and investment structures, professional tax advice can help ensure losses are used as effectively as possible.

Final Thoughts

While you generally can’t offset capital losses against income tax in the UK, they remain a valuable tool for reducing Capital Gains Tax. The key is knowing when and how to use them. With exceptions like Share Loss Relief, some losses can reduce your income tax bill, but only in specific cases.

Understanding how capital losses work, and keeping good records of any disposals or loss-making events, will ensure you make the most of the available reliefs – now and in future years.