Where a company is placed in liquidation, company law restricts the transfer of shares in the company. This means that, in the absence of special CGT rules, you may not be able to realise a capital loss on shares that have become worthless.
In certain circumstances, you can choose to realise a capital loss on worthless shares prior to dissolution (if you had acquired the shares on or after 20 September 1985). This applies if you own shares in a company and the liquidator declares in writing that there is no likelihood you will receive any further distribution in the course of winding up the company. The liquidator's declaration can still be made after you receive a distribution during the winding-up.
If you make this choice, you will make a capital loss equal to the reduced cost base of the shares at the time of the liquidator's declaration. The cost base and reduced cost base of the shares are reduced to nil just after the liquidator makes the declaration.
These rules do not apply:
- where a company is placed in receivership or is de-listed, or
- to units in unit trusts.
Example – Liquidator's declaration that shares are worthless
The liquidators of HIH Insurance Ltd made a written declaration on 10 October 2001 that they had reasonable grounds to believe that there was no likelihood that the shareholders of HIH Insurance Ltd would receive any distribution in the course of the winding up.
Hillary purchased shares in HIH Insurance Ltd on 1 August 1999. CGT event G3 happened in relation to her shares on 10 October 2001 when the liquidator made the declaration. Hillary chose to make capital losses equal to the reduced cost bases of her shares as at 10 October 2001. She claimed the capital losses in her 2001–02 tax return.
If CGT event G3 has not happened or you have not chosen for it to apply, you may make a capital loss on shares when a court order is given to dissolve the company. Also, if a company is wound up voluntarily, shareholders may realise a capital loss either three months after a liquidator lodges a return showing that the final meeting of the company has been held, or on another date declared by a court. The cancellation of shares as a result of the dissolution of the company is an example of CGT event C2.
On 11 May 2004, the government announced it intends changing the law so that shareholders can choose to make a capital loss where any insolvency practitioner (not just a liquidator) declares shares are worthless – see What's new.End of example