When a sole trader (or self-employed) makes a trading loss it can be utilised in several ways to reduce tax liability. Effective loss planning should prioritise saving tax at the highest marginal rate, avoiding erosion of the personal allowance, and utilising losses sooner rather than later.
The available loss reliefs for a continuous trade are as follows:
ITA 2007 s.64 Claim (Against Net Income)
If a sole trader incurs a trading loss in a tax year the trading income assessment for that year is reduced to nil. The loss can then be offset against the net income of either the current or the preceding tax year by using a ITA 2007, s.64 claim. Both potential claims are independent; partial claims are not permitted.
The claim(s) must be submitted by the first anniversary of 31 January following the end of the tax year in which the loss occurred.
ITA 2007 s.71 Claim (Against Capital Gains)
After utilising the maximum s.64 claim(s) for the year any remaining trading losses can be used to offset capital gains for that year. Claims can be made for the current and/or preceding tax year.
The amount of loss available to offset capital gains is the lesser of:
The remaining trading loss after the s.64 claim(s) for that year; or
The net capital gain, reduced by any carried-forward capital losses (the relevant maximum).
The claim must be submitted by the first anniversary of 31 January following the end of the tax year in which the loss occurred.
ITA 2007 s.83 Claim (Losses Carried Forward)
Unutilised trading losses can be carried forward and offset against future profits from the same trade. There is no restriction on the amount of trading losses that can be carried forward under ITA 2007 s.83.
The claim must be made within four years from the end of the tax year in which the loss occurred.
Other Trading Loss Reliefs
In addition to the reliefs for ongoing businesses, there are specific reliefs for new businesses, cessation of trading, and incorporation.
ITA 2007 s.72 (New Business)
Losses incurred in the first four years of trading can be offset against net income for the three preceding tax years, on a first-in, first-out basis.
Relief under ITA 2007 s.72 is restricted to the greater of:
£50,000, or
25% of the individual's adjusted total income.
Note that this restriction applies only to loss relief against non-trading income and not to losses set against income from the same trade. The claim must be submitted by the first anniversary of 31 January following the tax year of the loss.
ITA 2007 s.89 (On Cessation)
Terminal loss relief allows the losses incurred during the final 12 months of trading to be carried back against trading income from the previous three tax years, on a last-in, first-out basis. The claim must be made within four years from the end of the tax year in which trading ceased.
ITA 2007 s.86 (On Incorporation)
If losses remain at the time of a business's incorporation, they can be carried forward by the individual and offset against future income from the newly incorporated company (including salary and dividends).
This relief applies automatically if:
The consideration at incorporation is at least 80% in shares;
The shareholder owns the shares throughout the tax year in which the relief is claimed; and
The company continues to carry on a trade.
No formal claim is required for this automatic relief.
Loss Relief Restriction
It should be noted that there are restrictions on loss relief against non-trading income under ITA 2007 s.64 and s.72. These restrictions limit loss relief claims to the greater of:
£50,000, or
25% of the individual's adjusted total income.
Speak to an Expert
It is common for sole traders to miss out on available reliefs for unutilised losses. If you're unsure how to maximise your benefit from trading losses, please get in touch with our tax team. We can help you navigate the various options and ensure that you make the most of available tax reliefs.
Authored by: London Tax Team
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