If you make a loss in your trade, profession or vocation there are various ways in which that loss can be relieved. It is important to consider all the options to ensure that best use is made of the loss.
The general rule is to obtain relief for tax at the highest rate of tax possible (as this will generate the biggest repayment) and as early as possible.
The options are to set the loss against:
• other income for the tax year in which the loss is made;
• capital gains of the same year;
• total income and gains of the previous tax year; or
• future profits of the same trade.
Special rule apply to losses in the early years of a trade (see Tip 26) and to losses on cessation (see Tips 97 and 98).
As it is not possible to tailor how much of the loss is used, if the loss exceeds income for the year of the claim, your personal allowance will be lost. Seeking to preserve personal allowances should form part of the loss relieving strategy.
Loss relief must be claimed.
Elliot has been in business for many years. In the year to 30 April 2012 (tax year 2012/13) he makes a loss of £20,000.
He has other income of £12,000 in 2012/13 and capital gains of £7,000.
In 2011/12 he had other income of £40,000.
The best course of action is for him to set the loss against his income of 2011/12 as this will generate a tax repayment of £4,000 (£20,000 @ 20%).
If he sets the loss against other income of 2012/13 he will lose the benefit of his personal allowance. Similarly, there is no point extending the claim to capital gains as these are covered by his annual exemption.
The best result is obtained by carrying the loss back.