Tax Adjusted Trading Losses – Individuals

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1 Trading losses

1.1 Trading Profit assessment

1. Sole traders are assessed on a tax year basis. If there is a trading loss, the trading profit assessment to include in the income tax computation is nil.

2. The trading profit figure in an income tax computation can never be negative.

1.2 Relieving the loss

The loss may be relieved according to the following rules. A repayment of income tax may result in some circumstances.

2 The reliefs available

The main reliefs available for a trading loss are as follows:

1. Carry forward against future trading profits of the same trade

2. Relief against total income of current and/or preceding tax year (in any order)

3. Following a claim in (b) above if any trading loss still remains, the taxpayer may choose to extend the loss claim against chargeable gains of that same tax year

4. Opening years loss relief against total income of preceding 3 tax years (FIFO)

5. Terminal loss relief (on cessation of trading) against previous 3 years trading profits (LIFO)

3 Carry forward of trading losses

1. A trading loss may be carried forward and set against the first available trading profits arising from the same trade.

2. The trading loss must be set off in full against the next available trading profit if this option is chosen; i.e. the taxpayer cannot choose the amount to relieve.

3. Any loss remaining is carried forward until further trading profits arise.

4. The loss may be carried forward indefinitely.

4 Loss relief against total income

1. A trading loss may be relieved against total income (after any qualifying loan interest payments) of the tax year of the loss and/or the preceding tax year.

• a loss for the year ended 31 March 2026, assessable in 2025/26 on a tax year basis, may be relieved against total income in the current tax year (2025/26) and/or in the previous year (2024/25).

1. If relief against total income is claimed;

• the loss must be set off to the maximum possible extent subject to a cap on income tax reliefs - see section (c) below.

• personal allowances may therefore be lost as total income is before the deduction of the personal allowance and partial claims are not allowed.

• a claim against total income may be made for either the tax year of the loss or the previous year or both (in any order). The two years are treated separately and thus a claim is required for each year.

1. A cap applies that limits the amount of loss relief available against a person’s total income. The cap is the higher of:

• £50,000, or

• 25% of person’s adjusted total income

Adjusted total income is total income less the gross amount of any personal pension contributions.

The restriction applies to:

• a claim against current year total income, and

• earlier years if set against income other than profits from the same trade

The cap will only be tested at TX-UK within this section of relief against the total income of current and/or the preceding tax year.

(d)   Relief of trading profits against capital gains:

After a claim to offset trading losses against total income, a taxpayer can then offset any remaining trading loss against chargeable gains in the same year.

The amount of trading loss that can be offset against gains is the lower of:

• Loss remaining after income claim = the ‘relevant amount’.

• The ‘maximum amount’:

£

––––

The trading loss is actually set against the current year net chargeable gains, before considering capital losses brought forward.

Note: Capital losses b/f are used in the calculation of the maximum amount, but may not actually be offset in the current year, as the trading loss is set off first followed by the annual exempt amount (AEA). If there are still net gains after the AEA then b/f capital losses will be utilised to reduce the net gains further.

The restriction of offset to a maximum amount of £50,000 or 25% of ATI does not apply to the offset against capital gains.

5 Losses in opening years

A special loss relief for losses arising in the first four tax years of trade.

• Loss is carried back three tax years on a FIFO basis, against total income.

• One claim applies to all three years and may generate a refund of income tax.

• The relief is all or nothing: it cannot be restricted to preserve the PA.

• The restriction on loss relief (25% of adjusted total income/£50,000) applies.

6 Terminal loss relief

1. The terminal loss is the loss of the final 12 months of trading.

The terminal loss (as computed) is then set against the trading profit for the tax year of cessation if any (this is usually a nil assessment given the loss arising) and then against the trading profits of the previous three tax years to the fullest extent on a LIFO basis.

If losses appear in a Section B/C question, be methodical and the following procedure should be adopted when answering questions:

(1)   Determine the tax adjusted profits and losses after capital allowances for each accounting period.

(2)   Determine when losses arise and therefore when loss relief is available; i.e. in which tax years.

(3)   Set up a pro forma income tax computation for each tax year side by side and leave spaces for the loss relief to be inserted later.

(4)   Set up a loss memo working for each loss to show how it is utilised.

(5)   If there is more than one loss, consider them in chronological order.

(6)   Set off losses according to the requirements of the question.