Ch 7: Trading losses

Question 1

What are the normal loss relief options for a sole trader/ partnership?

Answer 1

1. CY (must deduct the max amount)
2. PY
3. CY then PY
4. PY then CY
   against total income before PA
5. All in CY then any excess losses against chargeable gains in the same tax year
6. Carry forward - any unrelieved losses MUST be carried forward against the first available profit in the SAME trade

Question 2

How can losses in opening years of trade be relived?

Answer 2

Any loss in the first 4 tax years of a trade can be:

- carried back for 3 years on a LIFO basis (all or nothing)

Question 3

How do you relive loss in the closing year of trade using terminal loss relief?

Answer 3

1. 6 April to cessation date
   Trading loss plus unrelieved overlap profits (if profit show nil)
2. Remainder of final 12 months up to 5 April
   Trading loss (if profit show nil here)
   = Terminal loss

Question 4

How can the terminal loss be relieved?

Answer 4

The terminal loss can be relieved against:

• the trading profits of the year of cessation and
• the trading profits of the 3 preceding years (LIFO basis)

Question 5

What does pre-incorporation losses relate to?

Answer 5

It’s when a sole trader ceases in trade and becomes incorporated (a company)

Question 6

How can the pre-incorporation losses be reieived?

Answer 6

They can be relieved against his income from the company:

• salary first then against interest and dividends
• the loss can NEVER be transferred to the company

Question 7

What is the condition for a trader to relieve his pre-incorporation losses?

Answer 7

They must have 80% of the consideration received from the company as shares

Question 8

What is the cap on loss relief/ qualifying interest?

Answer 8

The higher of:

• £50,000
• 25% of adjusted total income (after deducting gross pension contributions; x 100/80)