What is a clogged capital loss on a family asset sale?

Direct answer

A clogged capital loss is a loss that is ring-fenced because of the person to whom you disposed of the asset. SARS says that a capital loss determined on a disposal to a connected person is treated as a clogged loss and may be set off only against capital gains from disposals to that same connected person. It is not a general capital loss that you can automatically use against every other capital gain.

Selling to a family member is a warning sign, but the exact connected-person relationship and the required timing must be tested. Preserve the relationship details, sale evidence and valuation support before completing the CGT section of your return.

What this means in practice

People often focus only on whether they made a loss compared with the purchase price. For a family transaction, the identity of the buyer can be equally important. SARS's clogged-loss guidance explains that the relevant relationship can be determined at a specified time, and the rules are not limited to a simple label such as “relative”.

Do not treat this rule as a reason to hide or abandon the loss. The ITR12 material contains connected-person questions and may ask for the details of the counterparty. The correct approach is to calculate the transaction accurately, identify the connected-person issue and keep the documentation that supports the result. An unsupported loss or an unexplained family price can lead to a difficult verification process.

The transaction may raise questions beyond a clogged loss. A sale at a non-market amount, an informal transfer, an estate arrangement, a donation or a company or trust transaction can have other consequences. This guide addresses only the ring-fencing warning. It does not decide the value or legal effectiveness of a particular family deal.

Step-by-step

1. Stop before treating the loss as ordinary.

If the buyer is a family member, a related trust, a company or another person with a connection to you, flag the transaction for review before finalising the CGT schedule.

1. Identify the parties precisely.

Record legal names, identity or registration details, the relationship and the date of sale. Do not use a vague description such as “family arrangement”.

1. Keep full sale and value records.

Retain the sale agreement, payment evidence, asset history, valuation material and correspondence. If price was negotiated, preserve the basis for it.

1. Calculate the gain or loss.

Determine proceeds and base cost according to the relevant CGT rules. Do not use a balance-sheet value, a current app value or an informal estimate as a substitute for evidence.

1. Complete the connected-person information.

Follow the current ITR12 guide and answer the connected-person questions honestly. Keep the return calculation with the source documents.

1. Ring-fence until the position is confirmed.

Do not automatically use the loss against unrelated capital gains. Obtain advice where the parties, timing or value are not straightforward.

Documents and records to keep

• Sale agreement, transfer evidence and bank proof.
• Acquisition and base-cost records for the asset.
• Valuation support and correspondence explaining the price.
• A note identifying the relationship and relevant date.
• ITR12, ITA34 and any SARS query or response.

Important limits and exceptions

Not every transaction involving someone described as family has the same result. SARS's page refers to the statutory connected-person categories and timing rules. A sale involving a spouse, child, parent, trust, company or group may need a specific review. Do not infer that a loss is available or clogged only from the family surname.

This article also does not determine whether market value is substituted, whether a donation occurred or whether the asset is capital rather than trading stock. A share trader, a business asset owner or a taxpayer using a trust should not rely on a generic personal-investment workflow.

When to get tailored advice

Seek advice before filing if the asset is material, the sale price is below market value, there is a trust or company involved, the loss is significant, or you intend to use it against another gain. TaxProof can organise the evidence and return entries, while a tax practitioner should review the connected-person and valuation consequences.

Related TaxProof guides

• Can I set a capital loss against salary or interest income?
• How do I carry a capital loss forward?

Sources

• SARS, Clogged Losses
• SARS, ITR12 Example Return