A capital loss is a term used to describe when you make a loss on selling an asset. An asset, in this context, could be a property, shares, a cryptocurrency, fine jewellery, a vintage car etc. And if you sell one of these assets for less than you originally bought it, this would be considered making a capital loss.
How does a capital loss work in action?
Check out this example of making a capital loss:
You buy a buy-to-let property for £250,000 in 2015
Five years later you sell it for £200,000
Overall, you make a capital loss of £50,000 on this asset (The buy price of £250,000 minus the sell price of £200,000)
You’re also allowed to claim losses on assets that you still own if they become “worthless”.
How does a capital loss relate to tax?
There are a number of things you can do with losses when it comes to tax. Here’s a selection:
You can offset a capital gain from the same year, and reduce your taxable profit – this means that you can use a loss like you might an expense and deduct it from your profits to be liable to pay less tax
Losses can be carried forward to the next year to offset a capital gain that you plan on making then
If a carried forward capital loss reduces your gain below the tax-free capital gains tax allowance (£6,000 in the 2023/24 tax year), you can take whatever losses are left and carry them to a future tax year
You’re not allowed to deduct a loss from giving or selling an asset to a family member, unless you’re also offsetting a gain from the same person
What’s a Capital Gain?
If you sell an asset for more than you bought it for, you make a profit. This profit is known as a capital gain. Profits that exceed the tax-free Capital Gains Tax Allowance mean that you’ll have to pay Capital Gains Tax on them.
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