Trading Losses Ch7 Flashcards
types of trading loss relief options (6)
- Normal loss relief option
- Cf of losses - default but not efficient
3a. Losses in the opening years of trade
3b. Terminal loss relief (closing year of trade)
3c. Pre incorporation losses
How to enter a trading loss in income tax comp by sole trader / partner?
Enter trading profit as nil in income tax comp then there are several ways of relieving loss (loss memo)
What is a normal loss relief option and criteria
- Set loss against income then gains
Trader can choose to set trading losses against total income of the tax year in which the loss making accounting period ends and/or preceding tax year so:
This year or
Last year or
This year then last year or
Last year then this year or
No claim for current/prior relief
- You cannot restrict the loss of the relief to preserve income to cover PA
- The trader can choose which year to set the loss against first
- If a trading loss has already been set against total income for a given tax year, the trader can then claim to set any excess losses against chargeable gains in the same tax year
-set the trading loss against total gains less capital losses for the year (loss capital losses bf)
- loss relief cannot be restricts to preserve capitals gain tax annual exempt amount
Criteria of cf of trading losses
- Default but not efficient
- If a trader does not use the loss, or, after using the loss, has unrelieved losses remaining, they must carry the loss forward to set against the first available profit of the same trade
- Losses are cf until they have all been set against future profits of the same trade
Factors influencing loss relief to use
- Marginal rates of tax (use loss v income taxes at highest rate)
- Utilisation of PA
- Cashflow
Summary of normal loss reliefs?
1.trading losses used va current and/or prior year total income
2. If used vs total income, can use excess va the gains of the same tax year
3. Any excess unrelieved loss is carried forward vs the first available profits of the same trade
How do losses in the opening years of trade work? 3a
- Losses incurred in any of the first 4 tax years of a trade can be carried back on a fifo basis to set against total income of the 3 tax years preceding the year of loss
- If we start trading and generate a loss in 23/24 we can set our trading loss against total income of
2.1 20/21 then
2.2 21/22 then - 22/23
What is terminal loss relief (closing year) 3b?
1.Terminal loss relief can be claimed for the trading loss arising in the final tax year of trading
2. There are also special loss relief rules for the ‘terminal loss’ - this is the loss of the final 12 months of trading
3. Terminal loss can then be set against
- the trading profits of the tax year of cessation and
- the trading profits of the 3 preceding tax years (working backwards) LIFO
NOTE:
1. If loss relief has already been claimed under terminal loss rules, any claim under loss against income (1) the final tax year will be reduced by the loss already used under terminal loss relief rules
- Of the loss relief has already been claimed against total income in the final tax year under (1) the terminal loss will be reduced by the loss already used
Summary of terminal loss relief?
- The terminal loss can be used vs trading profits of the final tax year and previous 3 tax years
- Or you can use normal loss rules on loss in final tax year
What are pre incorporation losses (3C)?
- If an unincorporated business is transferred to a company, the trader who incurred the losses can offset them against his income from the company:
- salary first then against interest n div
- provided at least 80% of the consideration received from the company is in shares
The loss can never be transferred to the company - not the best due to director would take payment from div rather than salary at lower so would be wasted
What is the cap on loss relief / qualifying loan interest?
- A cap restricts how certain amounts are set against adjusted total income
1.1 the cap is the higher of
- £50k
- 25% of adj total income (ATI)
- ATI is after deducting gross personal pension contribution (not gift aid)
- An unrestricted amount of loss can be claimed against profits of the same trade for the preceding tax year. The restriction is then against other income.
- Any unrelieved restricted loss is cf against future profits from the same trade.
- The cap applies to the offset of:
5.1 losses against total income of the current and preceding tax year
5.2 qualifying loan interest against total income
5.3 losses in the first 4 tax year of trade against general income in the 3 preceding years
5.4 capital losses on the disposal of qualifying unquoted shares against general income