The latest Finance Bill aims to counteract the use of “artificial” arrangements on trade losses by restricting loss relief to £25,000 if an individual “trades” in a non-active capacity (i.e. spends an average of under 10 hours a week on the commercial activities of that trade). It therefore seems a good time to look at what other loss relief is allowable.
Commerciality test
As a basic test, a tax loss is not available for relief unless the trade is carried on on a commercial basis, with a view to the realisation of profit, and the trader must now prove that he is active on the trade for 10 hours a week. The following assumes this is the case.
Losses in early years
Losses incurred in the early years of a trade (i.e. the year in which the trade started, or in the next three years) may be carried back against total income for the preceding three years (earlier years first).
Pre-trading expenditure is relieved as if it has been incurred on first day of trading.
Offset trading loss against capital gain
Any trading loss that is potentially allowable against total income can also be offset against a capital gain where the loss exceeds your total income for the year.
Property losses
An excess of property expenses over rents creates property losses. These losses can be offset against current or future property income.
Capital losses
Capital losses can be used against capital gains of the same year or carried forward.
Losses can only be carried back on death, when a three-year carry back is allowed.
Disposal to a connected person
Where a capital tax loss arises on such a disposal, it can only be offset against gains on disposals to the same connected person.
Negligible value
If an asset has become negligible in value, a claim can be made such that the asset is treated as having been sold and immediately reacquired thus generating a loss. “Negligible” is not defined by statute but HMRC’s view is that the term means “worth next to nothing”.
