Tax losses can arise due to a difficult trading period. They can also be created if you invest in qualifying equipment and you are able to set this cost against your trading profits – if the cost of the assets exceeds your profits you will have a tax loss.
There are three ways you can utilise these losses:
- Against income or possibly against capital gains of the same year or an earlier year.
- Against profit of the same trade.
- Against income from a company to which you transferred your trade.
Not all losses may be claimed in these ways and sometimes the amount of loss you claim is restricted or limited. Loss relief is one of the reliefs where there is a limit, it is the higher of £50,000 and 25% of the adjusted total income of the year. HS227 Losses (2017)
Additionally, the amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:
- have worked for less than 10 hours a week on average on commercial activities of the trade,
- are a Limited Partner or a member of a Limited Liability Partnership,
- have a trade which is carried out wholly overseas,
- have claimed certain capital allowances,
- have income from oil extraction activities or oil rights.
You can also claim relief for losses in the final 12 months of the trade, against profits in the trade during the three previous years.
Another key planning objective when considering the best way to use losses is to aim to reduce your income, and therefore tax liability, in a year when tax was paid. In this way, the loss relief claim will result in a tax refund.
Calculation and utilisation of losses is not a simple matter. As discussed above, the aim should be converting the loss into a cash flow boost – a tax refund. We would be happy to discuss your options.