RSM Ireland

Can I bring forward capital loss on my investment property?

Q I purchased an investment property in Ireland in December 1973 for £5,500, plus expenses of £514, total outlay being £6,014. I sold the property in June 1983 for £18,000. Indexation relief was allowable over this period. When this was applied a multiple factor of 3.76 was applied to the purchase price. Including expenses, this increased the “indexed” sale price to £22,593; as a result, the sale price registered a capital loss of £4,593. (£22,593 less £18,000). My question is can I bring forward this capital loss, created after indexing of £4,593, to offset any capital gains in future years.

Capital Gains Tax (CGT) is a tax on gains arising from the sale of capital assets. The gain to be taxed is arrived at by deducting the cost of the asset from the sales proceeds, and applying the tax rate to the taxable gain to determine the payable amount. Where an allowable CGT loss arises on the disposal of an asset, it may be set off against chargeable gains arising in the same year of assessment.In general, an unused loss may be carried forward and set off against chargeable gains which arise in future years.

Indexation: Indexation provides relief for the effect of inflation over the period of ownership of an asset. It was introduced in 1978, and provides relief from the part of the gain attributable to inflation.For CGT purposes an asset purchased prior to April 6th, 1974 is treated as if it was purchased on April 6th, 1974, at the market value on that date.

This provides us with the base cost of the asset for indexation purposes. The indexation rate of 3.759 was correctly applied. The use of indexation created a “notional” capital loss of £4,593/€5,832.

There is a restriction on the use of indexed losses. Indexation cannot be used to create or increase a monetary loss. A monetary gain or loss arises before any indexation is applied to the calculation. If there is a monetary loss on disposal, the loss arising cannot be increased by indexation, and the loss available for use is the actual monetary loss. Similarly, where a monetary gain occurs, a loss cannot be created through indexation. In such instances, the disposal of the asset is treated as giving rise to neither a gain nor a loss.

When you sold your property a monetary gain of £11,986/€15,219 arose. When indexation is applied, an indexed loss of £4,593/€5,832 arose. As indexation and the 1974 market value cannot be used to create a loss where there is an actual gain, both indexation and the 1974 market value should be ignored. Applying the rules set out above, there is a no gain/no loss position.

As a result, you were not required to pay CGT on the disposal of the property in 1983. However, there are no losses available for you to carry forward against future gains.

Niamh Horgan is a Tax Manager at RSM, rsm.global/ireland.

Published in The Irish Times.

 

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