For this relief, much thanks

What are the different types of loss relief available? I am asked this by clients A LOT.

The main ways of relieving losses are to set them off against the total income of the same year; set them off against either total income or profits from the same trade of the previous year(s); carry forward any unrelieved losses to use against income/profits from the same source.

Claims are usually made on the self-assessment return for the loss-making period, and must be made within the normal time limit for amending that return.

General restrictions apply to all taxpayers to restrict loss relief (other than carrying forwards) where trades are not carried out on a commercial basis with a view to profit.

For hobby farmers and market gardeners (ITA 2007, s. 67-70), sideways loss relief is denied where losses (before deducting capital allowances) were made in the previous five tax years, unless there is a ‘reasonable expectation of profit’.

Trading losses

1. Individuals and trustees

(references are to ITA 2007 unless stated)

i) Current year trading losses

Section 64 allows the loss to be offset against the total income of the tax year in which the loss arises and/or the previous tax year, in whichever order you choose. This, along with early years’ loss relief under s. 72 (see iii below), are collectively known as sideways loss relief. In addition, once a s. 64 claim is made, a further claim can be made (under ITA s. 71 and TCGA, s. 261B) to set the unrelieved loss against the capital gains of the year(s) for which s. 64 claims are made.

This relief is given in priority to all other capital losses (see BIM75430). A claim under s. 71 may not be the best use of the loss because setting it against total income offers higher rates of tax relief.

Three-year carry-back (FA 2009, Sch 6), the 2008 pre-Budget report and the 2009 Budget provided provisions for trading losses to be carried back three years instead of one. For unincorporated businesses, it applies to losses arising in 2008-09 and 2009-10.

A claim under ITA s. 64 must be made first to use the loss against the total income of the loss-making year and/or the previous tax year (there is no limit to those claims) before the additional carry-back claims can be made. You can carry back a maximum of £50,000 of losses that arise in each of the 2008-09 and 2009-10 years.

The losses are set against profits from the same trade and against latest years first.

Important points to note

Loss relief claims cannot be restricted to preserve the personal allowance or CGT annual exemption. The amount of the loss claim is therefore the lower of:

 the unrelieved loss; or

 the total income/gains for the year against which the loss is to be set.

Loss relief for Class 4 NIC purposes operates in the same way as it does for income tax. However, where there were no profits liable to Class 4 in the year for which income tax relief is claimed, the Class 4 losses are carried forward to use against future profits that are liable to Class 4.

It is important to keep track of these amounts, since the self-assessment pages do not have boxes to track such losses. Adjustments must be made manually in boxes 101 (self-employment full) or 25 (partnership full).

 

ii) Losses brought forward

These losses must be set off against the first profits from the same trade, even if this means that personal allowances are wasted. The brought-forward loss is used in priority to any other reliefs.

 

iii) Losses in the first four years of trading

Losses in the first four years of trading can be relieved against the total income of the three years preceding the loss-making year, against earlier tax years first.

 

iv) Losses in the final 12 months of trading (terminal losses)

Terminal losses, including losses attributable to capital allowances and overlap relief, can be set against profits of the same trade in the previous three tax years, against later tax years first.

 

2. Partnerships

There are restrictions on sideways relief (and often qualifying loan interest) for losses arising:

To non-active members of any partnership, being those who work for fewer than 10 hours a week on average, and to limited partners of a limited partnership (s. 103B). The amount of sideways loss relief per tax year is the lower of:

 

i) £25,000 (s. 103C); or

 

ii) Their ‘contribution to the firm’, being the balance on their current and capital accounts at the end of the basis period, reduced by any earlier sideways loss relief to which these sections apply (s.104-105).

To non-active members of LLPs in the first four tax years of trading (s. 110). Relief is also limited to their ‘contribution to the firm’, as above.

As a result of certain film partnership losses (s. 74, s. 102-116).

It is important to note that previously these restrictions only applied to losses of trades and not losses of professions or vocations, but the restrictions were extended by HMRC Brief 66/09 to cover all such losses arising after 21 October 2009.

 

3. Companies

(references are to ICTA 1988 unless stated)

Corporation tax is charged by reference to accounting periods, which means the period covered by a corporation tax return (s. 12). The period for which the company draws up its accounts is known as the ‘period of account’ (s.832(1)). The total profits include a company’s chargeable gains. The legislation s. 393A requires current year trading losses to be set first against total profits of the current and then the preceding accounting period.

The three-year carry-back rules operate slightly differently for companies:

 It applies to losses made in accounting periods that end between 24 November 2008 and 23 November 2010 and a maximum of £50,000 of losses per 12-month accounting period can be carried back.

 The losses can be offset against total profits, not just trade profits.

Relief for brought forward and terminal losses operate as they do for individuals (see (1) (ii) and (1) (iv) above).

Special rules apply for group and consortium relief, successions and non-trading loan relationship deficits, which are beyond the scope of this article.

Land and property losses

Losses from UK property businesses, overseas property businesses and property losses from partnerships are treated as separate types of property businesses, and so losses on one type cannot be offset against gains from a different type.

Individuals can only offset losses from UK or EEA furnished holiday lets against their total income; however, this provision is expected to be abolished after 5 April 2010. The time limit for claiming is the same as for setting trading losses against total income.

Companies must also offset the same type of furnished holiday lettings losses, as well as other UK property losses, against their total profits of the same accounting period (ICTA s. 392A). Any unrelieved UK loss is carried forward and is treated as a loss of the following period. Overseas losses can only be carried forward to use against overseas rental profits.

Capital losses

Losses arising to individuals (but not trustees or companies) on the disposal of EIS shares or other shares in unquoted trading companies, where the shareholder was the original subscriber, can be set against the total income of the tax year of the loss and/or the previous tax year and in either order – see HMRC guidance HS286 and HS297.

All other current year capital losses must be offset against capital gains of the same year, even if this wastes the annual exemption. Any excess is carried forward and set against future capital gains, but only to the extent that they exceed the annual exemption.

Capital losses arising to companies are offset against current year capital gains with the excess carried forward to use against future gains.

Companies can also elect to have both capital losses and gains treated as if they had arisen to a different group company (TCGA s. 171A).