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How to use terminal losses?

In which order should terminal losses be used?

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In 2018/2019, a client sold their business. They have terminal losses of £45,000 due to overlap profits. They also have a capital gain of £250,000 and pension income of £20,000. The capital gain is subject to entrepreneurs relief.

Should the terminal losses first be set off against:

A) Trading profits from previous years (same trade).

B) Capital gain.

C) Other income in the same year, down to zero, effectively losing their personal allowance.

If they are first used against profits from the same trade in previous years, they will be fully used in 2017/2018 and 2016/2017 combined.

Thanks.

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By Tax Dragon
18th Jan 2020 13:54

That reads like part 2 of a practice question for an exam.

You need to tell us what part 1 said too, for background.

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Replying to Tax Dragon:
RLI
By lionofludesch
18th Jan 2020 15:37

Quote:

That reads like part 2 of a practice question for an exam.

Is it because that's what it is ?

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By Lee11_1989
18th Jan 2020 17:31

To my knowledge, terminal losses are usually offset against income from the same trade in previous years first. Or you can carry them forward against future earnings, for example, if you know you'll go into a higher rate of next next year.

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Replying to Lee11_1989:
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By Wanderer
18th Jan 2020 17:40

Quote:

Or you can carry them forward against future earnings, for example, if you know you'll go into a higher rate of next next year.

Really?
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Replying to Wanderer:
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By Lee11_1989
18th Jan 2020 17:58

I'm doubting myself now. I thought you had to elect to use losses, but maybe that doesn't apply to terminal losses.

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Hallerud at Easter
By DJKL
18th Jan 2020 19:46

Having the Marginal rates of tax in prior years might help thoughts , though given we are told they get fully used in two earlier years then averaging that has profits £22,500 average in each of these years.

Chances are even if PA wasted in earlier years that is likely the best approach, certainly if currently class IV liability in these years.

In current year you have £20,000 pension and a CG but to relieve against this you will not use the terminal loss provisions, so it is a choice of approach-TL and lapse two years PA or claim against other income/CGT same year but as ER on point re CG relief is worth lower marginal rate of tax.

However on what basis were accounts prepared would be my first question before doing any calculations.

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