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Update on this item: HMRC changed its policy in this matter in October 2010, see Share Loss Relief

If you subscribe for shares in a trading company, and later dispose of them at a loss, you can offset the loss against general income. HMRC now says that where shares were subscribed for in joint names relief is impossible.

This strange attack on couples (for it is mainly married couples who hold shares in joint names) appears to have come from a reanalysis by HMRC of section 131 of the 2007 Income Tax Act (previously section 574 ITEPA 1988). It applies to shares “which have been subscribed for by the individual”. So, if you apply the letter of the law, as HMRC seem to be doing you get yourself into a situation where it is not possible for a joint owner to subscribe to a jointly owned share.

Now, following “the letter of the law” it will probably be possible to argue that the individual who physically applied for the allotment or signed the cheque will qualify for loss relief, as he is an individual, right? But, is this really what parliament intended when provided us with the mechanism to obtain loss relief? 

It is even more perplexing if you appreciate that section 135 will allow you to subscribe to qualifying shares and then transfer them to your spouse. The spouse is then treated as slipping into your shoes and deemed to have subscribed to them in their own right. A similar mechanism means that you are treated as subscribing to bonus issues or new shares from a share for share exchange.

Trevor Johnson, past president of the Association of Taxation Technicians (ATT) says that section 131 “is an ideal candidate for an Extra-Statutory Concession, if only the Revenue were prepared to be open-minded about the case and apply a little common sense. They ought to realise that it is nit-picking of this nature that brings the tax system into disrepute and ridicule.”

Who remembers Arctic Systems?
Until tax bodies like the ATT are able to hammer some common sense into HMRC tax advisers should advise clients to refrain from subscribing for certain shares jointly.

Which shares?
Section 131 applies to shares which qualify for EIS relief, or shares in qualifying trading companies as defined in section 134. In general terms, this covers most shares in unquoted trading companies.