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Taxation FA22 > Trading losses for individuals > Flashcards

Trading losses for individuals Flashcards

1
Q

When trading loss arises?

A
  • when the normal tax adjusted trading profit computation gives a negative result
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2
Q

When can trading loss can occur?

A

Tax adjusted trading profit / loss before capital allowances less capital allowances could result in trading loss

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3
Q

Capital allowances in identifying a trading loss notes

A
  • are taken into account in calculating the amount of trading loss available for relief
  • can increase a tax adjusted trading loss
  • can turn a tax adjusted trading profit into a trading loss
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4
Q

Where a trading loss occurs

A
  • the individual’s taxable trading income is £Nil
  • a number of loss relief options are available to obtain relief for the loss
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5
Q

What are the main reliefs available for trading loss?

A
  • carry forward against future trading profits
  • relief against total income
  • opening year loss relief against total income
  • terminal loss relief against pervious trading profits
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6
Q

Loss relief options in ongoing years

A

If an individual makes a trading loss in the ongoing years of a business, the trader initially has to decide whether to claim relief against total income or carry forward all of the loss.

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7
Q

What if a claim against total income is made?

A
  • any remaining loss is automatically carried forward unless the individual then makes a claim to set the loss against chargeable gains.
  • that claim against gains can only be made after a claim against total income, in the same tax year, has been made
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8
Q

Principles of the relief - carry forward trading losses

A
  • automatic relief
  • carry forward against first available, trading profits, of the same trade
  • can carry forward indefinitely
  • but must set off maximum amount possible each year, no partial offset allowed
  • if no specific claim made - carry all loss forward
    -if specific claim made (against total income or chargeable gains) carry forward remaining unrelieved loss
  • claim must be made to establish the amount of the loss carried forward
  • for a 2023/23 loss, the claim must be made by 5 April 2027
    (4 years from the end of tax year in which the loss arose)
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9
Q

Why is useful carry forward loss relief?

A
  • the taxpayer gets the potential of an unrestricted period over which to utilise the available loss
  • providing that the taxpayer’s trade continues, and
  • the taxpayer makes subsequent future profits from the same trade
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10
Q

What are the disadvantages to carrying losses forward?

A
  • in a prolonged difficult trading period for a business, relief may take a long time to materialise
  • obtaining relief in a latter period is less advantageous from a cashflow and time value of money perspective
  • there is no certainty about the levels of future trading profits and whether it will be possible to utilise the loss
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11
Q

Loss relief against total income

A
  • a taxpayer making a loss in the tax year 2022/23 has the option to make a claim against total income and it’s optional
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12
Q

If loss relief against total income is claimed it permits the taxpayer to relieve trading losses against the total income of the:

A
  • tax year of the loss, and/or
  • previous tax year
    A claim may be made in:
  • either year in isolation, or
  • both years, in any order
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13
Q

Five key options to consider obtaining relief for the loss:

A
  1. set against total income of the tax year of the loss, then set against total income of the previous tax year
  2. set against total income of the previous tax year, then set against total income of the current tax year
  3. set against total income of the tax year of the loss
  4. set against total income of the previous tax year only
  5. make no claim and carry all of the loss forward
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14
Q

What if the relief against total income is claimed?

A
  • the taxpayer must set off the maximum amount possible for a given year, a partial claim is not allowed
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15
Q

Other points regarding obtaining relief for the loss

A
  • claim for loss relief against total income may result in the personal allowance being wasted
  • the savings income nil rate band and dividend nil rate band could also be wasted if a claim is made to use the loss against total income
  • a claim must be made within one year of 31 January following the end of the tax year of loss,
    for 2022/23 loss the claim must be made by 31 January 2025
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16
Q

Relief of trading losses against chargeable gains

A
  • optional
  • if claimed it permits the taxpayer to relieve trading losses against the chargeable gains in the same tax years as a claim against total income, tax year of the loss, previous tax year
  • the claim may be made in either year in isolation or both years in any order
17
Q

The relief operates as follows: charg.gains

A
  • a trader is permitted to set unrelieved trading losses against chargeable gains, provided the maximum possible amount is offset against total income of the tax year in question first
  • there is no need to make a claim against total income for the previous tax year
  • if claimed, the unrelieved trading loss is treated as a current year capital loss
  • the loss is deducted before both the CGT annual exempt amount AEA-12,300 and any capital losses brought forward
18
Q

Maximum amount of loss relief under rules is the lower of:

A
  • the remaining loss,
  • chargeable gains in the tax year after the deduction of current year capital losses and brought forward capital losses
    It is crucial that if a claim is made against chargeable gains this is shown in a separate computation to any claim against total income.
19
Q

Other points regarding the relief of trading losses against chargeable gains

A
  • the annual exempt amount is deducted after this relief, therefore a claim may result in wasting the annual exempt amount
  • a claim is required in the same time period as for a claim against total income, for a 2022/23 loss the claim must be made by 31 January 2025
  • relief against chargeable gains normally saves tax at 10% or 20%
20
Q

The procedure for dealing with questions involving losses

A
  1. Determine the tax adjusted profits and losses after capital allowances for each accounting period
  2. Determine when losses arise and therefore when loss relief is available ( in which tax years).
  3. Set up a pro forma income tax computation for each tax year side by side and leave spaces for the loss set off to be inserted later
  4. Set up a loss memo working for each loss to show how it is utilised
  5. If more than one loss - consider the losses in chronological order
  6. Consider each option - be prepared to explain the options, the consequences of making a claim and the advantages and disadvantages
  7. Set off losses according to the requirements of the question, or in the most beneficial way if it is a tax planning question
21
Q

What is the difference between the opening years of trade and ongoing business regarding relief for trading losses?

A
  • the relief for trading losses in the opening years has option special 3 year carry back relief
22
Q

In calculating a loss in the opening years note that:

A
  • it is vital to remember that a loss may only be relieved once
  • there is no such this as overlap losses
  • if a loss is included in the computation in more than one tax year, then the amount taken into account in the first tax year cannot also be included in the second tax year
23
Q

How the special opening year relief against total income operates?

A
  • optional claim
  • applies to loss arising in any of first 4 tax years of trading
  • if claimed, set loss against total income, in 3 tax years before tax year of loss, on a FIFO basis
  • there is no need for the trade to have been carried on in the earlier years
  • one claim cover all 3 years
  • example: loss in y/e 31.12.2022 (2022/23) will be set off in : 1. 2019/20, 2. 2020/21, 3. 2021/22
  • if claimed:
    • must set off maximum amount possible
    • cannot restrict set-off to preserve the personal allowance
    • therefore, the benefit of the personal allowance may be wasted if a claim is made
  • for 2022/23 loss, the claim must be made by 31 January 2025
24
Q

The options available in the closing years of trade are exactly the same as those available to ongoing business, except that:

A
  • the option to carry forward losses is not available as there will be no further trading profits once the trade ceases
  • an extra option of terminal loss relief is available
25
Q

What if a trading loss occurs in the closing years?

A
  • the trader has to decide whether to claim relief against total income (and then possibly offset against gains) or
  • claim terminal loss relief against trading profits
26
Q

Terminal loss relief

A
  • optional claim, however will normally be claimed, otherwise the benefit of the loss may be lost
  • the relief is to set the ‘terminal loss’ against ‘trading profit’, of the last tax year, carry back three tax years, on LIFO basis
    -the terminal loss is the loss of the last 12 months
  • for 2022/23 loss, the claim must be made by 5 April 2027 (i.e. within 4 years of the end of the last tax year of trading
27
Q

Terminal loss calculation

A

6 April before cessation to the date cessation
- actual trading loss in this period (ignore if a profit)
- overlap profits not yet relieved
12 months before cessation to 5 April before cessation
- actual trading loss in this period ( ignore if a profit)

28
Q

The maximum deduction from total income is the greater of: ( amount of relief that can be deduced when a claim is made against total income)

A
  • £50,000
  • 25% of adjusted total income
29
Q

Calculation for adjusted total income ATI

A

Total income
Less: Gross personal contribution

30
Q

When the limit applies to trading losses set against?

A
  • current year total income, and
  • the prior year if set against income other than profits of the same trade
31
Q

What are the aim to satisfy goals of a taxpayer?

A
  • obtain tax relief at the highest marginal rate of tax
  • obtain relief as soon as possible. This can mean that tax from year earlier years is repaid, or it may reduce tax payable soon
  • ensure the taxpayer’s PA, savings income nil rate band and dividend nil rate band are not wasted, if possible
32
Q

When it may not be possible to satisfy all the aims of tax advice?

A
  • in order to get a higher rate of relief, the taxpayer may have to waste the PA
  • carrying losses forward may give a higher rate of relief, but the cash flow implications of claiming relief now rather than waiting for relief may be more important to the taxpayer
33
Q

Factors to consider in understanding the position of taxpayer - income relieved - total income - normal claim (possibly also chargeable gains relief)

A

Timing the relief: Current and/or previous tax year
Flexibility:
Either, neither or both tax years, All or nothing, Maximum restriction apply

34
Q

Factors to consider in understanding the position of taxpayer - income relieved - Total income - special opening years claim

A

Timing of relief: Preceding three tax years on a FIFO basis
Flexibility:
Only in the first four years of trade, all or nothing,
can be used with a normal claim against total income, maximum restriction apply

35
Q

Factors to consider in understanding the position of taxpayer - income relieved - Future trading profit

A

Timing of relief: As soon as possible in future (same trade)
Flexibility: None

36
Q

Factors to consider in understanding the position of taxpayer - income relieved - Trading profit - terminal loss claim

A

Timing of relief: Current and then preceding three tax years on a LIFO basis
Flexibility:
Only on cessation, all or nothing, can be used with a normal claim against total income

37
Q

Loss relief claims available for partnership losses

A
  • same as those for sole traders
  • a partner joining a partnership may be entitled to claim opening year loss relief, where a loss has incurred in the first four tax years of the partnership
  • a partner leaving the partnership may be entitled to claim for terminal loss relief

Taxation FA22 (25 decks)

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