Trading Losses

Question 1

What are the main reliefs for trading reliefs that it can be put against?

Answer 1

Opening Year Relief
Relief against total income
Relief against future trading profits 
Relief against chargeable gains
Terminal Year Relief

Question 2

What is carry forward relief?

Answer 2

Default relief

Against the first available future trading profits from the SAME TRADE.

Losses cannot be restricted therefore PA maybe wasted

Question 3

What is relief against total income?

What happens to the excess loss?

Answer 3

This is offset against TOTAL PROFIT

Optional
Losses are set against total income in the ‘tax year of the loss’, and/or -the preceding (previous) year

Can set off

• CY CF
• CY then CB then CF
• CB then CY then CF
• CB CF
• Remaining losses CF

Losses cannot be restricted therefore PA maybe wasted. However if it excess the maximum amount then it may be restricted.

Excess losses can be carrief forward or set against chargeable gains

Question 4

What is relief against chargeable gains and what are the conditions?

Answer 4

This can only be used if the trading loss has been
relieved against total income (UP TO NIL) in the tax year in which a claim against gains is required. So the remaining loss can then be relieved against
chargeable gains.

Do not need to claim against total income in both years first

Maximum amount needs to be relieved, therefore AE maybe wasted as well as the PA

No maximum loss restriction

Question 5

**What is the profoma for the gains relief (After working out the amount to deduct)

Answer 5

Trading loss is treated as a current year capital loss,

So it is deducted;
CY capitalgain 
Less CY Capital losses 
**Loss relief ****
Less Capital losses B/FWd (ONLY HERE it is restricted to protect AEA)

• And before the Annual exemption amount of £3k

Question 6

What is the restriction on the relief against total income and what does it apply to?

Answer 6

The cap is the higher of £50,000 or 25% of a person’s adjusted total income. For this purpose, total income is AFTER deducting the gross amount of personal pension contributions from the total income.

• Applies to trading losses set against CY Total income and earlier years if set against income from anything other than profits of the same trade
• The offset of qualifying loan interest against total income.
• The offset of losses arising in the first four tax years of a business against general income in the three preceding years.
• The offset of capital losses on the disposal of qualifying unquoted shares against general income.

Question 7

For the restriction on the relief against total income, how is this applied for the offsets against earlier years and what happens to the remaining amount?

Answer 7

• Set against profits from same trade first, then non-trading income
• Losses that cannot be offset are;
- Can claim to offset against chargeable gain
- Carried forward as usual

Question 8

When there is more than one loss to offset, what is the general rule?

Answer 8

Deal with the earliest loss first.

Losses brought forward are offset in priority to CY and PY claims

Question 9

What is the opening loss relief rule?
What is it relieved against
and in what order

Answer 9

Optional claim

Is available if trading losses arise in any of first 4 tax years of trading and is set against total income by carrying back 3 tax years on a FIFO basis

Question 10

How is opening loss relief rule applied

Answer 10

If claimed, set loss against
- total income
- in 3 tax years before tax year of loss
- on a FIFO basis
One claim covers all 3 years
Maximum amount needs to be relieved, therefore PA maybe wasted

Question 11

What is the terminal loss relief

Answer 11

Optional

The relief is given for the loss of the last 12 months of trading.

Question 12

How is the terminal loss relieved rule?
What is it relieved against
and in what order

Answer 12

The relief is;

• Against profits of the SAME trade
• Of the tax year of cessation and
• the three preceding tax years
• On a LIFO basis

Question 13

What is the calculation/profoma of the terminal loss?

Answer 13

1) Loss from 6 April to date of cessation
2) 12 Months before cessation to 5th April before cessation. (IGNORE IF THIS IS A PROFIT)
3) Plus unrelieved overlap profits

YE 31 Jan 19, ceasing trade on 30th Sep 19

1) 6 April 19 TO 30 September 19 (6months)
2) 1 Feb 19 TO 5 April 19 (£24,000×2/8)
1 October 18 TO 31 Jan 19 (£39,000×4/12)
3) Overlap profits

TOTAL ONLY 12MONTHS ALLOWED

Question 14

What are the 2losses that CAN be restricted for individuals?

Answer 14

• Capital loss CF (Against gains)
• Trading loss restricted to higher of £50k or 25% Adjusted total income (Against Total income)

•

Question 15

Generally when working with losses, what are something you want to consider before beginning to deep dive into the question?

Answer 15

Whether early year of business or last year of business and if there are any chargeable gains in the tax year

Question 16

What gives the earliest relief?

Answer 16

Reliving against total income and special opening year relief give the earliest relief

Question 17

What is an important thing to remember amount the cap on the loss relief restriction & what is a tip to use

Answer 17

Only losses set against NON TRADING income of earlier years are restrict to the max amount. Losses set against prior year trading profits are not restricted.

separate the loss memo into relief against trading and non trading

Question 18

When relieving opening year loss, what is very important to remember?

Answer 18

Remember the basis period for the first year and the second and then time apportion the loss according to that and then carry it back

Question 19

**What is the governments motivation for when relieving losses against capital gains?

Answer 19

They want you to relieve the loss but with a limit as they still want you to pay the 10/20% of CGT.

So they’ll want you to relieve the minimum amount whether it is the remaining loss to relieve or the calculated amount;

Chargeable gain
Less: CY capital loss
Less: B/Fwd losses (Here NOT RESETRICTED for AEA)

The not restrict feature again is to lower the amount so that the least out of the two can be chosen

Question 20

***What is the maximum amount of trading loss that can be offset against chargeable gains?

Answer 20

The maximum amount of trading loss that can be offset against chargeable gains is the lower of;

1) Remaining loss or
2) Chargeable gains in the year after deduction of CY capital loss and B/Fwd losses. in this calculation, b/fwd capital losses are NOT RESTRICTED to preserve the AEA in this calculation. Remember to NOT CARE ABOUT AEA

This maximum loss (Treated as CY capital loss) is then offset against current year chargeable gains, after current year capital loss but before brought forward capital losses. The offset of brought forward capital losses IS RESTRICTED to preserve the AEA.

Question 21

With terminal loss, what is important to remember?

Answer 21

That in total only 12 months are allowed

and if there are profits in the calculation then it is ignored

Question 22

State the factors that would influence an individuals choice of loss relief claims

Answer 22

The rate of income tax or capital gains tax at which relief will be obtained with preference being given to income charged at the higher rate of 40% or additional rate of 45%

The timing of the relief obtained, with a claim against total income/chargeable gains of the current tax year or preceding year resulting in earlier relief than a claim against future trading profits.

The extent to which personal allowances, capital gains annual exempt amount and the savings and dividend nil rate bands may be wasted

Question 23

With regards to opening year baiss, what must you remember when calculating the basis of assessment when both the first period and year have losses

Answer 23

to not double count the losses like you would for over lapped profits