losses - continuing trade

Question 1

continuing trade - types of losses

Answer 1

s.64 - current year loss relief - offset losses against other income in that tax year
s.71 - remainder of s.64 loss that can be used against capital gains
s.83 - carry losses forward against future trading income

Question 2

s.64 - current year losses

Answer 2

losses can be offset against net income

this it total income less deductible payments but BEFORE personal allowance to give a revised net income:

income x
less deductible payments (x)
net income x
less s.64 losses (x)
revised net income x
less personal allowance (x)
taxable income x

claim can be made against current year AND/OR previous year
* can be done in any order (CY-PY or PY-CY or just CY or just PY or none)
* is not mandatory
* cannot use partial claims - meaning personal allowance could be wasted

Question 3

s.64 - loss planning

Answer 3

1. look at income and offset loss against income that is taxed at the highest rate of tax
2. look at loss of personal allowance as well as dividend and savings allowances and relief for interest paid
3. timing - best to relieve a loss earlier rather than later - s.64 cannot carry forward so best to offset against earlier profit so if loss is made next year there is more loss to set it against

Question 4

s.71 - extension to capital gains

Answer 4

if there is remaining loss from s.64 CY & PY claim then it can be used against capital gains under s.71

they are used AFTER current year capital losses but BEFORE capital losses b/fwd

cap gains x
cap losses in year (x)
net gain x
s.71 trading loss (x)
x
less AEA (x)
less cap losses bf (x)
chargeable gains x

this can be done for CY and PY

make s.64 claim BEFORE can extend to gains

Question 5

s.71 - extension to cap gains further points

Answer 5

wasted personal allowance in CY as it reduced income to nil under s.64 before it can move onto s.71

s.71 loss will be the LOWER of:
* remaining loss after s.64 claim
* the relevant maximum

net gains in year (cap gain (CY) less cap loss (CY)) x
less capital losses b/fwd ( x )
relevant maximum x

once the relevant maximum has been set this amount must be used against gains - lower amount to preserve AEA is not allowed

Question 6

s.83 - carry forward losses

Answer 6

losses can be carried forward and offset against future profit of the SAME TRADE

claim will be made when the loss is not used against other net income or capital gains

can be made AFTER a s.63 claim OR if NO s.64 claim has been made (covered by PA/ has no income)

is a last resort as it delays relief for losses

once it is carried forward it MUST be used against the next available trading income

Question 7

claim dates for s.64, s.71 & s.83

Answer 7

s.64 - TR deadline date 31st Jan

s.71 - none specified but would claim same time as s.64 so 31st Jan

s.83 - cf losses are automatic but should claim within 4 years of the end of the tax year

Question 8

s.64 restriction on loss relief rules

Answer 8

the total amount of reliefs that can be deducted in arriving at net income for a tax year is the GREATER of:

• £50,000 OR
• 25% of adjusted total income for the tax year

adjusted net income:
generally total income less gross amount of personal pension paid

applies to claimed under s.64 which can be relieved against non-trading income

no restriction against income of the same trade

restriction applies to
* early trade loss relief (first 4 TYs)
* post-cessation payments (7years after trade ceased)
* qualifying loan interest

Question 9

s.64 other restriction

Answer 9

losses under s.64 cannot be realised unless the following two conditions are met:

• trade is carried out on a commercial basis
• trade is carried out with a view to realisation of profits

Question 10

losses for farming or market gardening rules

Answer 10

if loss was made in the previous 5 tax years when trade is farming or market gardening then…

GENERAL loss relief is denied.

can only be carried forward against trade profits under s.83

Question 11

affected loss rules

Answer 11

if in a tax year:
* carried out trade in a non-active capacity &
* make a loss
the loss is an affected loss

max amount of affected loss that can be set against non-trading income and gains is £25,000
no restriction against loss of the same trade

non-active = do not devote a significant amount of time to it
significant = at least 10 hours a week

affects losses under s.64, s.71 & s.72 - do not affect cfwd of trade losses

applies for sole traders only