Income Tax 2: Trading Losses

Question 1

Who can claim reliefs for trade losses?

Answer 1

Sole Traders and Partners

Partner
- can only claim for their share of the loss
- set out in PA or equal

Question 2

How might you use trading losses?

Answer 2

4 Options

1. current / prior year loss relief
2. carry forward the loss
3. Carry forward relief on incorporation
4. terminal loss relief

Question 3

How does current / prior year loss relief work? What are the rules?

Answer 3

Can set off relief from total income before applying personal allowance for:
- current year; or
- prior year

Rules
- must use all losses available at once until losses run out or all income is offset (without being able to apply personal allowance)

Left over
- if they have some left over (ie losses where more than total income before PA)
- then can use it to reduce prior years total income OR current year capital gains

Question 4

How does carry forward loss relief work for trading losses? What are the rules?

Answer 4

Losses can be carried forward and set off against future profits of same trade

Rules
- only for profits of SAME trade
- must be against next available profits/trade income

Question 5

How does carry forward on incorporation of business loss Relief work for trading losses?

Answer 5

Used when sole trader or partner transfers business to a company and receives shares in return

Can set off any unused trading losses against:
- salary; or
- dividends received from the company for any year in which they own shares

Rules
- have to have shares when using relief (cannot sell them and still use it)

Question 6

How does terminal loss relief work? Rules?

Answer 6

When trader ceases trading

can deduct loss from:
- trading profit in same tax year first;
- deduct from trading profit from 3 previous years (from latest to oldest)

Rule
- must be from most recent profits to least recent
- must be against trading profit from same entity not other income