CAT / FIA FTX Syllabus B. Adjusted Profit / Loss Computations - Relief for trading losses - Notes 1 / 1
Relief for trading losses
Trading losses can be:
Relieved against Current year total income
Carried back 12 months of total income
Carried forward against the Trading income of future years
Total income consists of:
Trading income
Property income
Interest income
Employment income
Trading losses carried forward against the Trading income of future years
A trade loss may be carried forward to set against the first available trade profits of the same trade.
The trading loss must be offset off in each future tax year untill the loss is fully relieved.
A trade loss carried forward cannot be set off against any other income.
Illustration:
Peter had Trading loss of £50,000
| Next year, Peter made the following income: | |
|---|---|
| Trading income | £20,000 |
| Property income | £10,000 |
| Interest income | £5,000 |
How can the trading loss be carried forward?
Trading loss of (£50,000) will be relieved against the trading income generated next year.
| Trading income | £20,000 |
|---|---|
| Less c/f trading loss | (£20,000) |
| Trading income | Nil |
| Property income | £10,000 |
| Interest income | £5,000 |
| Total income | £15,000 |
| Loss memo: | |
|---|---|
| Trading loss | (£50,000) |
| c/f loss relief in (next year) | £20,000 |
| Loss to be carried forward | (£30,000) |
Illustration
Paul has the following results:
| Year ending | £ |
|---|---|
| 31 December 2021 | (£20,000) |
| 31 December 2022 | £10,000 |
| 31 December 2023 | £25,000 |
Paul's net trading income, assuming that he claims carry forward loss relief is:
| 2021/22 | 2022/23 | 2023/24 | |
|---|---|---|---|
| £ | £ | £ | |
| Trading income | 0 | 10,000 | 25,000 |
| Less carry forward loss relief | (0) | (10,000) | (10,000) |
| Net trading income | 0 | 0 | 15,000 |
| Loss memorandum | £ |
|---|---|
| Trading loss y/e 31/12/21 | 20,000 |
| Less: offset in 2022/23 | (10,000) |
| Less: offset in 2023/24 | (10,000) |
| Loss to be carried forward | 0 |
Trading losses relieved against Current year total income
Trading losses can be relieved against the total income of the current year and the total income of the previous 12 months.
Illustration
Mia has a loss incurred in 31 December 2023 of £30,000.
Her property business income is £25,000 a year, and she wishes to claim loss relief for the year of loss and then for the preceding year.
Her trading income in the previous year was £ nil.
What is her taxable income for 2022/23 and 2023/24?
| The loss-making period ends in 2023/24, so the year of the loss is 2023/24 | ||
|---|---|---|
| 2022/23 | 2023/24 | |
| £ | £ | |
| Total income | £25,000 | £25,000 |
| Less loss relief against general income | (£5,000) | (£25,000) |
| Net income | £20,000 | £0 |
| Less: Personal allowance | (£12,570) | (£12,570) |
| Taxable income | £7,430 | £0 |
In 2023/24, £12,570 of the loss has been wasted because that amount of income would have been covered by the personal allowance.
The factors that will influence the choice of loss relief claims are:
Loss relief is as soon as possible.
Loss relief is obtained at the highest tax rate.
Personal allowances are saved when the claims are made