Using Losses: Types of Claim
Trade losses may be used in several ways against:
- Income or possibly against capital gains of the same year or an earlier year
- Profit of the same trade
- Income from a company to which you transferred your trade
Not all losses may be claimed in all these ways and sometimes the amount of loss you claim is restricted or limited.
Loss set-off against income or income and capital gains:
You may use the loss against your income of 2021 to 2022 or 2020 to 2021 or both years in any priority. Losses can only be used once. Partial claims are not allowed so you must use all the loss or relieve as much of the income as possible in a tax year before allocating any remaining balance to other years or claims. If you cannot deduct all loss under a claim for trade loss relief against the general income you may be able to use any remaining balance, or part of it, against your chargeable gains.
Loss used against income in 2018 to 2019 to 2020 to 2021: early trade losses relief:
You can make this claim for losses made in the first 4 years of trade. Start by reducing the 2018 to 2019 income. If the loss is more than your income, use the remaining loss against your income in 2019 to 2020 and then from 2020 to 2021. Do not make this claim if you, your spouse, or civil partner first carried on the trade before 6 April 2018. If you make any of these claims, make sure that you include losses claimed by you other than in your tax return. The section on stand-alone claims gives more information on this.
Relief against a profit of the same trade: extended loss carry back for businesses:
As a response to the difficulties facing businesses due to COVID-19, the government has provided additional relief for trade losses made in the tax years 2020 to 2021 and 2021 to 2022. Losses made in these two tax years may be relieved against profits of the same trade in the three years prior to the tax year of the loss.
This means that losses made in 2020 to 2021 can be used against trade profits made in 2019 to 2020, 2018 to 2019 and 2017 to 2018 and losses made in 2021 to 2022 can be used against trade profits made in 2020 to 2021, 2019 to 2020 and 2018 to 2019.
The losses must be used against the most recent profits first and a valid claim under section 64 of the Income Tax Act 2007.
The amount of trade losses that can be relieved in the earliest two years of the extended carryback period is capped at £2,000,000 for losses made in 2020 to 2021 and £2,000,000 for losses made in 2021 to 2022.
Relief against income or capital gains: restrictions:
Restrictions may apply for claims to use losses against income or capital gains. Some restrictions deny relief. Others limit the amount of loss you can use.
Do not make any of these claims if you:
- Use cash basis
- Do not run your trade commercially and for profit, for example, if your trade is run as a hobby
- Are you a farmer or market gardener and you also made a loss
Tax-generated losses cannot usually be claimed against income or chargeable gains.
The amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:
- 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 that is carried on wholly overseas
- Have claimed certain capital allowances
- Have income from oil extraction activities or oil rights
Relief against a profit of the same trade: loss carried forward:
You can carry forward your loss, or the unused part of the loss, and any unused losses from earlier years to use against:
- Profits of the trade in later years
- Income from a company that you transferred your trade to, wholly or partly in exchange for shares in the company
Loss carried back: terminal loss relief:
You can claim relief for losses in the final 12 months of the trade, against profits in the trade from 2021 to 2022.
- That your claim is for terminal loss relief
- The amount of loss used for each year
- The decrease in tax due for earlier years
Only make this claim if your trade ceased from 2021 to 2022.
How to calculate your terminal loss
- If your accounts to cessation cover a period of 12 months the loss and any unused overlap profit is your terminal loss
- If your accounts to cessation cover a period of more than 12 months, your terminal loss is a proportion of the loss and any unused overlap profit
- If your accounts to cessation cover a period of fewer than 12 months, your terminal loss is the loss made in 2021 to 2022 and a proportion of the 2020 to 2021 loss and any unused overlap profit
- If you had a profit in either accounting period, you need to work out the profit or loss in the part of the final 12-month period:
Treat a profit in either period as a nil loss.