25-09-2019
Setting off trading losses against other income

Where an individual makes a loss in a trade or incurs a loss as a partner in a partnership trade, the tax rules allow the loss to be set against general income. Certain trade losses may be offset against general income. It may also be possible to carry trade losses back to earlier years or forward to subsequent years. However, partial claims are not allowed. This means that a loss set against income for a particular year must be set as far as possible against that income, even if this means that personal allowances available for that year are not fully utilised.

This relief against general income extends to:

  1. losses in trades (including a profession or vocation), provided they are carried out on a commercial basis and with a view to the realisation of profits;
  2. losses arising out of land - mines, quarries and other concerns;
  3. but not to relief for losses in an employment or office; these are not trade losses.

By way of explanation, HMRC’s internal manuals provide the following example:

Mark has been carrying on a trade for a number of years and makes up his accounts annually to 30 September. He makes a loss of £20,000 in the year ended 30 September 2012; that is, for the tax year 2012-2013. He can relieve that loss against his general income in 2012-2013 or by reference to his general income in 2011-2012 or his general income in both 2011-2012 and 2012-2013. The claim must be made by 31 January 2015.

If the loss is to be the subject of claims for both years, Mark must choose which claim has priority. But partial claims cannot be made. The loss used in the priority year is an amount equal to income of that year. The remaining loss can be used in the other year.

If Mark had general income of £22,000 in 2012-2013 and £5,000 in 2011-2012, the alternative reliefs under S64 ITA 2007 would be:

  • £20,000 against 2012-2013, or
  • £5,000 against 2011-2012 and £15,000 against 2012-2013.

It is not possible to relieve, say, £2,000 against 2011-2012 and £18,000 in 2012-2013. The claim for each year must be the smaller of the loss available for relief and the income available to be relieved.

Source: HM Revenue & Customs | 25-09-2019

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