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Tax with Tallon: How to use carried forward trading losses against a 'gain'

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31st Oct 2005
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Paula Tallon, director of direct tax with Chiltern responds to accountants' queries.

Q: My client, a limited company which commenced trading about 2 years ago has been offered £400,000 for its goodwill. The company has trading losses brought forward of about £150,000. My understanding is that trading losses brought forward cannot be offset against capital gains. Is this true?

A: Generally trading losses brought forward cannot be offset against capital gains. The question is whether or not we have a capital gain. Since April 2002 goodwill is dealt with under the rules for intangibles, FA 2002 Sch 29. This means that any transactions relating to goodwill acquired on or after 1 April 2002 fall into these new rules. Looking at your particular case the company only commenced trading two years ago so, provided the goodwill was not acquired from a related party, its disposal will be taxed using the rules in Sch 29 FA 2002. The 'gain' on the goodwill gives rise to a taxable credit instead of a capital gain. This means that it is treated as income, a receipt of the trade. S393 TA 1988 allows trading losses to be carried forward and set against trading profits in the succeeding accounting period. In your client's case the trading losses of £150,000 can be offset against the profit on the goodwill. This is very often overlooked and I would recommend that where there is a sale of a business and there are trading losses you should always do the maths. If you look at the numbers a sale of shares might not be the best route!

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