How to make the most of trading tax losses

As we approach the end of yet another tax year readers with possible tax losses for the current tax year may find this article of some interest. A claim to set off losses has to be "all or nothing".

For example, in setting a £10,000 loss against income of £10,000, the claimant would probably prefer to claim only £5,000 of relief, as the remaining income would be covered by their personal allowance, and therefore not taxable. This would preserve some loss to carry forward and set against the profits of a later year.

Such a partial claim is not possible. Once a decision about loss relief claims has been made, either the full amount of the loss, or the full amount of the income (if the loss is greater) will be used.

1. Pension contributions - don't forget that if you reduce your taxable income by utilising tax losses you are also reducing your income for pension premium purposes.
2. Carry forward against future profits of the same trade - this is normally regarded as the relief of last resort, as it delays loss relief recovery. Losses are set against the first available profits generated from the same trade, and cannot be "partly disclaimed" to preserve personal allowances. If the business ceases, then subject to terminal loss relief rules (see below), any remaining losses are lost forever.
3. Set off against other income of the year and the preceding year - more immediate relief for the loss is available by setting it against other income sources. Relief is given by setting the loss against other income of the year of the loss, or the preceding year.
4. Extending claims to capital gains - it is possible to extend a loss relief claim to set the trading loss off against the capital gains of the year of the loss and the preceding year. There are a number of potential disadvantages to this form of loss relief recovery. They include the potential loss of taper relief for CGT purposes (up to 5 April 2008) and loss of the annual exemption.
5. Losses in the early years of trade - when businesses incur losses in the first four tax years in which the trade is carried on, special relief is available to allow the loss to be carried back three years and set against the total income of those years, earliest year first.
6. Terminal losses - The loss sustained in the last 12 months of trade of a business is available for terminal loss relief. Relief is given against the trading profits (not other income) of the last three fiscal years of the business, taking later (most recent) years first.