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A look at restrictions, including worked examples.

One of the advantages of trading as a sole trader or a partnership is that if the business makes losses then they are relievable against the total income of the individual ie salary, rental income and even chargeable gains.

The legislation

As highlighted in (link to article Loss relief options available to a sole trader) s64 and s72 of Income Tax Act 2007 allows the trade losses to be set off against general income if the person: 

  • carries on a trade in a tax year, and
  • makes a loss in the trade in the tax year or in any of the next three tax years.

Trade loss relief against general income for a loss made in a trade in a tax year is not available unless the trade is commercial. The trade is commercial if it is carried on throughout the basis period for the tax year on a commercial basis and with a view to the realisation of profits of the trade.

Restriction on income tax relief

From 6 April 2013 the total amount of certain income tax reliefs that can be used to reduce total taxable income is limited to £50,000, or 25% of the individual’s adjusted total income, if higher. Adjusted total income is only worked out if the total income is over £200,000. If total income is below £200,000 the limit on income tax reliefs is £50,000. Trading losses are included within the list of restricted reliefs.

The main reliefs subject to this limit are:

  • trade loss relief against general income and early trade losses relief
  • property loss relief
  • post-cessation trade relief, post-cessation property relief, employment loss relief, former employees deduction for liabilities, losses on deeply discounted securities and strips of government securities
  • share loss relief, unless claimed on Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) shares
  • qualifying loan interest.

Example: Adjusted total income (as extracted from Tolley)

Henry has trade losses in 2018/19 of £200,000 and 2017/18 profits from the same trade of £70,000. He has other income each year of £120,000.

His relief against general income is capped at £50,000 for both 2017/18 and 2018/19.

Henry makes a claim to set £50,000 trade loss relief against his 2018/19 general income and to carry back £70,000 against 2017/18 profits from the same trade. He also claims £50,000 carried back against his general income in 2017/18.

Henry’s income chargeable to tax is:

2018/19

£

Income

120,000

Less: sideways trade loss relief (capped)

(50,000)

Income chargeable to tax

70,000

2017/18

£

Income (£70,000 + £120,000)

190,000

Less: 2018/19 trade loss relief against same trade (uncapped)

(70,000)

Less: 2018/19 trade loss relief (capped)

(50,000)

Income chargeable to tax

70,000

Note that this example ignores the personal allowance.

 Useful links:

Help sheet 204

BIM85700

 Article from ACCA In Practice