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Ch. 10 Trading Losses Notes (1)

Chapter 10 discusses trading losses, detailing how they are calculated and the relief options available, including trade loss relief against general income and capital gains. It outlines restrictions on claiming relief, the process for carrying forward losses, and the benefits of early trade loss relief for new businesses. The chapter also covers terminal trade loss relief, allowing losses on cessation to be carried back against previous trading profits.

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2 views7 pages

Ch. 10 Trading Losses Notes (1)

Chapter 10 discusses trading losses, detailing how they are calculated and the relief options available, including trade loss relief against general income and capital gains. It outlines restrictions on claiming relief, the process for carrying forward losses, and the benefits of early trade loss relief for new businesses. The chapter also covers terminal trade loss relief, allowing losses on cessation to be carried back against previous trading profits.

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CH 10: TRADING LOSSES

 A loss is computed in exactly the same way as a profit.


 Loss relief is given by deducting the loss from total income to calculate net
income.

Trade Loss Relief against General Income (Total Income)


 Relief is against the income of the tax year in which the loss arose. In addition, or instead,
relief may be claimed against the income of the preceding year.
 A claim for a loss must be made by the 31 January, which is 22 months after the end of the tax
year of the loss: thus by 31 January 2027 for a loss in 2024/25.
 The taxpayer cannot choose the amount of loss to relieve thus the loss may have to be set
against income part of which would have been covered by the PA or taxed at 0% in the savings
income nil rate band or the dividend nil rate band, though he can choose whether to claim full
relief in the current year and then relief in the preceding year for any remaining loss or vice
versa.

Example
Mary had a loss of £26000 in her period of account ending 31st March 2025. Her other income is
£19000-part time employment income a year, and she wants to claim loss relief against general
income for the year of loss and then for preceding year. Her trading income in the preceding
year was nil. What is her taxable income for each year, and comment on the effectiveness of the
loss relief?

Question

Restrictions on Trade Loss Relief against General Income


 Relief cannot be claimed against general income unless the loss-making business is conducted
on a commercial basis with a view to realize profits.
 The restriction on trade loss relief against general income, whether claimed for the tax year of
the loss or the previous year is that the total deductions in a tax year cannot exceed the
greater of: -
a) £50000; and
b) 25% of the taxpayers adjusted total income for the tax year

Adjusted total income= total income – gross personal pension contributions

 If a claim is made for relief against general income in the previous year, there is no restriction
on the amount of loss that can be used against trading income (of the same trade). The
restriction only applies to other income in that year. Any restricted loss can still be carried
forward against future profits from the same trade.

Example
Richard, in 2023/24 made a trade profit of £20000 and a loss of £210000 in 2024/25. He has
property business income of £130000 in 2023/24 and £220000 in 2024/25. Show his taxable
income for the tax years 2023/24 and 2024/25 assuming he claims relief for his trading loss
against general income in both of those years.

Question

Carry Forward Trade Loss Relief


 These are losses carried forward to set against first available trade profits of the same trade in
calculating NET TRADING INCOME. This can be carried forward for any number of years unless
they have been entirely used up.
 This is the only trade loss relief which applies to FHLs

Question
Trade loss Relief against Capital Gains
 The trading loss is first set against general income of the year of claim, and only any excess loss
is set against capital gains. The taxpayer cannot specify the amount to be set against capital
gains, so the annual exempt amount may be wasted.
 We usually set off the lower of:
a) Excess trade loss and;
b) Net Current Capital Gains – Capital losses b/fwd.

NB: Net current capital gains= Current capital Gains – Current Capital Losses

Example
Losses in Opening Years
Loss Relief Options
 The available options are:
1. Loss relief against total income.
2. Carry forward relief
3. Early trade loss relief.

Early Trade Losses Relief


 This is available for trading losses incurred in the first four tax years of a trade.
 It is obtained by setting the allowable loss against general income in the 3 years preceding the
year of loss, applying the loss to the earliest year first e.g. a loss arising in 2024/25 may be set
off against income in 2021/22, 2022/23 and 2023/24 in that order.
 The claim must be made by 31 January, 22 months after the end of the tax year in which the
loss is incurred i.e. 31 January 2027 (for 2024/25).
 The advantage of early trade losses relief is that it enables losses to be carried back for three
years and so gives the relief earlier than the other loss reliefs.

Example

Capital Allowances
 Instead of claiming all the capital allowances a trader is entitled to, they can adjust the size of
the loss relief claim, which will increase the balance carried forward to the next year’s capital
allowance.
 This is useful for tax planning such that personal allowance could be preserved or the effective
rate of relief for capital allowances in future periods will be greater than the rate of tax relief
for the loss relief.

Example
The Choice between Loss Reliefs

Terminal Trade Loss Relief


 This allows a loss on cessation to be carried back for relief against trading profits in previous
years.
 The relief is given in the tax year of cessation and the 3 preceding years, later years first.
 For a 2024/25 loss, a claim must be made within 4 years of the end of the last tax year of
trading (i.e. by 5 April 2029)
Calculation of Terminal Trade Loss Relief

Example:

Question:
End of Chapter Questions

1.

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