ACCA TX ^UK Syllabus B. Income Tax And Nic Liabilities - Relief for trading losses - Notes ^{7 / 8}

Trading losses can be:

1. Carried forward against the Trading income of the same trade of future years

2. Relieved against Current year total income plus capital gains

3. Carried back against 12 months of total income plus capital gains

1) Carried forward against the Trading income

Trading losses can be carried forward against the Trading income of future years

Illustration:

Peter had Trading loss of £50,000

How can the trading loss be carried forward?

Trading loss of (£50,000) will be relieved against the trading income generated next year.

2) Relieved against Current year total income plus Capital Gain

Trading losses can be relieved against the total income of the current year and the total income of the previous 12 months. 

If the total income of the year has been used, then the chargeable gains of that year can also be used to relieve the loss remaining.

Total income consists of:

1. Trading income

2. Property income

3. Interest income

4. Employment income

Other Income

is any income other than Trading income.

For example:

1. Property income

2. Interest income

3. Employment income

Other Income - maximum limit

For using the loss against other income (not including trading income), there is a maximum limit 
which applies, this is the greater of £50,000 or 25% of total income.(including trading income)

• For example 

  if you have a trading loss of £300,000 and employment income (other income) is £250,000, the amount that can be relieved is the greater of £50,000 or (25% x £250,000) = £62,500.

  Therefore, the amount of loss that would be relieved against employment income that year is £62,500. 

  Note, this applies to the carryback claim against total income also. 

  However, the previous year's trading profit can be entirely used, it only applies to other income. 

  For example

  This year, you have a trading loss of £300,000 and no other income.

  Last year, there was a trading profit of £10,000 and other income for the year was  £250,000, the amount that can be relieved is the greater of £50,000 or (25%* £260,000) =  £65,000 PLUS £10,000 from trading profit, therefore £75,000 of loss can be relieved.

  Illustration

  This year, John had a trading loss of (£100,000).

  Last year, He had a trading income of £2,000 and other income of £300,000.

  How much of his trading loss can he relieve using the carry back total income claim?

  Solution
  Trading loss (£100,000)

  Trading profit £2,000

  Other income Restriction 

  The higher of:
  25% x £302,000 = £75,500 0r £50,000

  Therefore, he can relieve £2,000 + £75,500 = £77,500 of his trading loss using the carry back total income claim.

Chargeable gains of the year

Once the total income of a year has been relieved against, and there is still trading loss remaining, then the loss can be used against the chargeable gains of the year.

• The amount of trade loss available to offset against chargeable gains is the lower of:

  - trade loss left
  - current year capital gains less current year capital losses less the full amount of capital losses brought forward.

• Chargeable gains do not have to be utilised in the loss claim but if the taxpayer chooses to use the trade loss against capital gains of the same year then the loss is treated as a current year capital loss and so it cannot be restricted to preserve the annual exemption.

  The only times you can restrict a capital loss to preserve the annual exemption are on capital losses b/f and capital losses in the year of death.

• For example:  

  Kathy had a capital gain of £44,000. She has a capital loss brought forward of £4,000 and has trading losses available of £24,000 - after a claim against the total income of the tax year.

   £
  Gain         44,000
  Current year trade loss (24,000)
  Annual exemption (3,000)
  Chargeable gain  17,000
  Loss b/f         (4,000)
  Taxable gain          13,000

  Illustration

  Jane had a trading loss of £100,000 and uses £45,000 against her current year total income claim.
  She had chargeable gains of £50,000 and a loss b/f of £1,000.  She wants to use the loss against chargeable gains.

  How much of the trading loss will she relieve against the chargeable gains?

  Solution:

  Trade loss available: 
  Lower of

  - trade loss left  £55,000 (100,000 - 45,000)
  - capital gain less losses cy and bf £49,000 (50,000 - 1,000)

  Therefore £49,000 is available to offset against current year gains.

  £
  Gain         50,000
  Current year trade loss (49,000)
  Chargeable gain 1,000
  Annual exemption (3,000)
  Loss b/f         (NIL*)
  Taxable gain          NIL

  *the loss b.f of £1,000 does not need to be used this year as the gain that is left after using the cy trade loss is covered by the annual exemption. The £1,000 capital loss and the remaining trade loss of £6,000 (55,000-49,000) will be carried forward.

Illustration:

How can the trading loss of the year ended 05/04/2025 be relieved against the current year total income and carried back against total income for 12 months?

Solution:

£65,000 of the trading loss of (£75,000) incurred in the year ended 05/04/2025 will be carried back against the total income generated in 05/04/2024 and Peter will receive a refund of any tax paid for 2023/24. 

This wastes the personal allowance unfortunately.

The remaining loss of £10,000 will be used against total income of the current year 2024/2025. 

This leaves total income of £15,000 of which will be mostly covered by the personal allowance.

It would not be advisable to use the £10,000 remaining loss against the gains of £5,000 in either year as most of the gains would be covered by the annual exemptions.

The personal allowance has not been wasted.

Note - assumes the PA and AE are the 2024/25 rates

The personal allowance is wasted in 23/24.

Loss memo:
Trading loss of 05/04/2025 (£75,000)
Carry back total income claim £65,000
Current year total income claim £10,000
Loss to be carried forward Nil 

Note carefully that it is a carry back claim against total income for 12 months.

Therefore, if there is a shorter chargeable accounting period before the loss making year, then the claim extends back for a full 12 months.

Opening years’ relief

If a loss is made within the first 4 tax years of trading (after applying the opening year rules) …
… then the loss can be relieved against total income of the individual for the previous 3 tax years on a FIFO basis.

The loss cannot be restricted to save personal allowances.

Illustration:

Mary started trading in 2021/22. She had never worked before she opened her business.

She made the following trading profits/losses in the following tax years.

2021/22 Trading profit £2,000
2022/23 Trading profit £17,000 

2023/24 Trading profit of £12,000 

2024/25 Trading loss of (£10,000)

How can Mary apply the opening years relief for trading losses?

Solution:

Trading loss of (£10,000) in 2024/25

Relieve first against:


2021/22 Trading profit £2,000 

2024/25 Trading loss (£2,000)

Trading profit reduced to £0 in 2021/22

Trading loss of (£8,000) in 2024/25 remaining

Relieve second against:

2022/23 Trading profit of £17,000 


2024/25 Trading loss (£8,000)
Trading profit reduced to £9,000 in 2022/23

2024/25 loss to carry forward - £nil

Note 
That the opening years relief has to be applied on a FIFO basis, therefore the personal allowances for 21/22 was wasted.

Terminal loss relief

If a trading loss occurs in the final 12 months of trading, then this trading loss can be offset against any trading profits of the final tax year of trade and then carried back for 3 tax years against the trading profits on a LIFO basis.

Once again, the loss cannot be restricted to save any personal allowances. 

Additionally, for the years in which tax has already been paid, this will result in a repayment of tax.

Illustration

• Mr. Unlucky, ceased trading on 31/03/2025 and incurred a loss of (£13,500).

• The trading profits for the year ended 31/03/2024 were £22,500.

• What is the terminal loss that Mr. Unlucky can claim terminal loss relief on?

Solution

Terminal loss is the loss in the final 12 months of trading which is 13,500.

Illustration:

How would Mr. Unlucky obtain terminal loss relief for this loss?

Solution:

He had profits of £22,500 in the year ended 31/03/2024.

• Terminal loss relief states that the terminal loss must be relieved against trading profits from the same trade of the last 3 tax years on a LIFO basis.

The factors that will influence the choice of loss relief claims are:

1. Loss relief is as soon as possible.

2. Loss relief is obtained at the highest tax rate.

3. Personal allowances are saved when the claims are made