Losses before loan interest?

Losses before loan interest?

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Which relief takes priority - loan interest or losses?  Since the capping regime began, it makes sense to claim full loan interest relief and limit loss claims, as the loss balance can usually be potentially relieved in another year, whereas loan interest cannot.

However, a client has a PY trading loss brought forward of £7k, CY trading losses from the same source of £30k, other income of £6k and gains of £95k.  The PY loss will go forward as there are no CY profits (let's save the discussion about whether the words 'may claim' in the relevant legislation means you have to claim PY trading losses against the first profits from the same trade for another day!) so I want to utilise my loan interest and loss in the CY against other income and gains (no carry back is required).

Clearly, I'd want to use loan interest first to maximise the loss relief to set against gains (personal allowance will go out the window regardless), but my tax software will only allow me to use the loss against income, then the balance against gains, so all of the loan interest is lost.

Looking at the legislation, each type of loss claim provides for the mechanics of claiming the particular loss against income (or gains), but I think this is part of the problem.  I'm told that the list of reliefs at s.24 ITA 2007 to be claimed at step 2 of the tax calculation process (s.23) is in no particular order of priority or preference, but in the case I'm looking at, using the loss instead of the loan interest to clear out income means additional CGT of just under £1.7k (i.e. the additional £6k of loss that could be set against gains at 28%).

The legislation must allow losses to take priority over loan interest where both are to be claimed, or in order for gains to be relieved via a trading loss, the income for the year must be extinguished by the same loss source.  Can anyone point me to where this is so I can satisfy myself that the software is doing it right!

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By Cirius di Lemma
14th Aug 2015 11:24

Maybe the software is wrong

ITA 2007, s. 25(2) addresses your point in part. However, if the loss relief claim and the interest relief claim are equally capable of reducing the taxpayer's income tax liability it does not help.

However, the key word is claim. Both the loss relief and the interest relief involve the making of a claim. Absent any provision to give one claim priority over the other, effect is given to claims in the order in which they are made. See also BIM85080.

The software providers will probably just have implemented logic provided by HMRC though, so it may be that any software will do the same thing.

If you claim the interest relief first, and claim the loss relief second, perhaps by filing on day one with just the interest relief claim, and then amending the return to include the loss claim the next day. You may well have a "computer says no" experience though.

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By User deleted
14th Aug 2015 12:57

To add to the previous post..

Explanatory note to s.24:

Such lists are arranged by reference to the order that the provisions appear in this Act and by reference to the date on which other legislation was enacted…….For the rules about what (if anything) may be done with any excess relief over the amount of income from which it can be deducted it is necessary to refer to the particular provisions dealing with the relief concerned

Then the note to s25 says:

This rule means that where a deduction may be set against more than one component of income or there are two or more deductions available, they are allowed in the way that produces the least income tax liability…….But the order in which they are made can affect the amount of relief that is available to carry forward or back (in the case of reliefs where that is a possibility).

 

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