Business losses

[alastair@livings.fre]

If a sole trader makes a net loss in one financial year am I right in believing that he can carry that loss forward to the next financial year and thus reduce profits made in that year thus reducing the tax liability.

What happens if during the next trading year the sole trader changes status to a limited company is there any way of making use of the previous years losses from a taxation point of view.

Thank you

[Nigel Lord]

Alastair

A sole trader's losses may be relieved in the following ways:

1. Offset against income arising from all sources in the same tax year.

2. Offset against income arising from all sources in the previous tax year.

3. Offset against capital gains arising in the same tax year.

4. Offset against capital gains arising in the previous tax year.

5. If the losses arise in the first four tax years of a new trade, they may be carried back against income arising from all sources three tax years previously, and then (if not all relieved) offset against income arising from all sources two and then one tax year previously.

6. Carried forward and offset against profits arising from the same trade in the following and succeeding tax years.

7. Where there is a cessation of the trade (such as in the event of incorporation) and the losses cannot be relieved under any of the above methods, 'terminal loss relief' may be claimed and the losses offset by being carried back against profits arising from the same trade in the three previous tax years (earliest first)

To maximise relief a planning exercise should be undertaken. Most of the methods of obtaining relief require an election.

Our firm specialises in this form of tax planning and will be pleased to provide further advice if instructed to do so.

Nigel Lord
Lord Associates
Caxton House
Old Station Road
Loughton
Essex IG10 4PE
Tel/Fax: 020 8508 1642
Mobile: 07769 931852
Info@lordassociates.co.uk