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Hello,
I have a question from the BPP exam kit about loss relief. Question Nr.24, part b.Hong has been in self-employment since 2003, preparing accounts to 5 April. For the year ended 5 April 2015 she made a trading loss of £45,800, and has claimed this against her total income and chargeable gain for the tax year 2013/14.
For the year ended 5 April 2014 Hong made a trading profit of £29,700. She also has a property business profit of £3,900 for the tax year 2013/14. Hong has an unused trading loss of £2,600 brought forward fromthe tax year 2012/13.
During the tax year 2013/14 Hong disposed of an investment property and this resulted in a chargeable gain(before the annual exempt amount) of £17,800. Hong has unused capital losses of £6,200 brought forward from the tax year 2012/13.I am not clear about the calculation of the taxable gain fort he tax year 2013/14.
The answer is:Taxable gain 2013/14
Gain: 17,800
Less: trading loss carried back (W) (11,600)
Net gain 6,200
Less: annual exempt amount (restricted) (6,200)
Taxable gain 0Working
Loss relief against gains is the lower of:
1 Loss remaining after relief against income £(45,800 – 31,000) = £14,800
2 Net gains ignoring annual exempt amount £(17,800 – 6,200) = £11,600
If I understand right, capital losses b/f are set off to reduce current year gain (less current year losses) to the annual exempt amount.Why is in this case deducted 11.600 (trading loss carried back) and not 6200 capital loss b/f.
I appreciate any help that you can provide.Once you have calculated the “maximum loss” available for this relief it is then treated as a capital loss of that year and is therefore applied first, BEFORE the deduction of either capital losses b/f or the AEA, as you show above in the Taxable Gain calculation.
It is the “maximum loss” calculation that is the problem here! This is not often tested and tends to cause student problems often leading to students not learning the entire relief and losing out on ALL the marks in a written question. This is why I chose to exclude it from the OT notes as you would still be able to score 80%+ of the marks in a written exam question – clearly this would still be a problem if it were tested as a MCQ!
The max loss working you also show above – “Loss relief against gains is the LOWER of”, which calculation gives you the 11,600 (of the 14,800 remaining loss) then to be used.Thank you very much for the explanation.
Do I understand right that the amount of 6.200 capital loss remains unused.Yes the unused capital loss b/f remains unused this year and is therefore c/f.
It is unfortunate that they have set an example where after the set off of the trading loss (as restricted) the net gain is then the SAME amount as the capital loss b/f (6,200) – this may lead to confusion about the use of the losses!
The net gain is then reduced to nil by the use of the current year loss as losses b/f will only be used to reduce net gains of the year in excess of the level of the AEA.
Hi
Could you please help me? I must be missing something. But I really don’t get this line in the working in the above example:
2 Net gains ignoring annual exempt amount £(17,800 – 6,200) = £11,600
Where do we get an annual exempt amount of 6200 from? Why isn’t it 10900? (2013/14)
And can you please confirm that AEA has the priority before any losses brought forward or back from other tax years?
Many thanks
AttilaAs I put in my answer above – the “Net gains ignoring the AEA” working shows the calculation of the maximum amount of the trading loss available for use. The 6,200 deducted in this working is not the AEA it is the capital loss b/f.
Losses are then used BEFORE the deduction of the AEA, hence in the BPP answer, the calculation of the 2013/14 taxable gain (which I copy below)Taxable gain 2013/14
Gain: 17,800
Less: trading loss carried back (W) (11,600)
Net gain 6,200
Less: annual exempt amount (restricted) (6,200)
Taxable gain 0This shows the trading loss (restricted to maximum of 11,600) being used BEFORE the deduction of the AEA and as the net gain remaining is only 6,200, the AEA used is restricted to that net gain of 6,200.
As the net gain after the deduction of the trading loss is already below the level of the AEA, none of the capital loss b/f has to be used so it is still able to be c/f..
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