individual losses

Question 1

what are the three types of individual losses

Answer 1

trading loss
property loss
capital loss

Question 2

how can capital loss be relieved by an individual, how is it different from company capital loss relief?

Answer 2

-can only hit capital gains
-current year then future gains

-no partial claim in current yr, in c/f partial claim is allowed (this option not available for companies)

In year of death:
Current year capital gains and then last 36 months capital gain
Partial claim allowed

Companies don’t have this relief as companies dont die
For companies, capital loss in yr of cessation will get wasted (unless Capital gain exists in current year)

Question 3

property losses for individuals and now is it diff from company

Answer 3

Will hit property income only (for companies it hits total income)
-current yr then future
-no partial claim in current yr or in future (for companies partial claim was allowed in future )

Question 4

trading loss for individuals - relief options

Answer 4

1- set off against current year total income
2- set off against last 12 months total income
3- set off against future TRADING income (in companies this was total income)

sequence not necessary
no partial claim allowed in any option (in companies this was allowed in future)

Question 5

trading loss amount restriction

Answer 5

trading loss against total income is restricted to:

trading income + 50,000 pounds

the 50,000 cap is increased to 25% of total income if a person’s income exceeds 200,000 pounds

this is to prevent people from using losses for tax avoidance and creating extra loss just to avoid tax.

Question 6

can trading loss be offset against capital gains?

Answer 6

yes after it has offset total income of that year
-partial claim not allowed
-no 50,000 restriction
-marzi, not mandatory

we can hit current year or carry back 12 months, gain tak janay ka raasta khulega when u have offset the total income of THAT year this k gain pe aap jana chahte hain
eg. we have a choice to hit current yr total income then go for gains
however, income tax rates are higher than CGT, so use loss in income tax return first

Question 7

terminal trading loss in individuals

Answer 7

last 12 months trading loss

relief against:
-current year trading income
-last 36 months trading income on LIFO basis

(in companies this used to offset total income)

partial claim not allowed

since this is only hitting trading income, one might think this is not a good option. trading income will be less in last3 yrs and loss will not be utilized fully. loss will be wasted.
so tax dept allows individuals to claim NORMAL loss relief rather than terminal loss relief (we can go back to 12 months only then, not 36. but we will hit total income + can go to gains as well)

Question 8

overlapping profit

Answer 8

old concept
in old yrs when accounting yr and tx year was not aligned, alignment karwane k lye, overlapping profit were created and double taxation was done

from finance act 2023, these rules are finish, so overlapping profit can not be created

now if any overlapping profit exists, then we will add in terminal loss,

it was double tax so we will add in loss to neutralize it

Question 9

what happens to terminal trading loss if an individual is ceasing the unincorporated business and turning it into a company

Answer 9

normally it gets wasted but in this situation, the wasted loss can be used against future incomes that the individual will get from the company in form of salary and dividends.

this relief is only available if that individual owns at least 80% shares in that company

Question 10

what relief is available if an individual has just started trading (opening year trading loss)

Answer 10

-trading losses in first 4 years of trade are called opening year trading losses

following reliefs are available:
-set off against last 36 months TOTAL INCOME on FIFO basis
-set off against current year total income
-then c/f against future trading income

-loss relief restriction of 50k applies when setting off against total income
-partial claim not allowed
-claim against capital gains is not available if using this option

-we can use normal loss relief option (12 months carryback, gains can be hit) rather than this option (36months carryback, no gains hit)

Question 11

Capital loss against a transaction with a connected person

Answer 11

special rules apply to prevent the potential abuse of capital losses.

family, friends, business partners

capital loss arising on a transaction with a connected person can only be offset against gains made with the same connected person.

if no future transactions, loss will be wasted.