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Where Taxpayers and Advisers Meet
Tax Insider Tip: Losses On Cessation
19/09/2016, by Tax Insider, Tax Tips - Business Tax
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A person may decide to stop trading if they are making losses.

Although the loss can be relieved in the usual way against income of the same and previous year, an additional relief is available for the loss made on the cessation of the business (known as a terminal loss).

A claim for terminal loss relief can be made if the person permanently ceases to carry on a trade and makes a terminal loss. The terminal loss is the loss made in the period beginning at the start of the final tax year and ending with the date of cessation plus any loss in the previous 12 months that falls into the previous tax year. The terminal loss may be relieved against the profits of the trade for the final tax year and previous three tax years. Relief is given against a later year before an earlier year.

Alternatively the loss can be set against total income (and extended to capital gains) of the year of the loss and/or the preceding year.

Will has been in business as a sole trader for a number of years. He prepares accounts to 31 March each year. His trade ceases on 30 June 2015.

He makes a profit of £10,000 for the year to 31 March 2015 and a loss of £16,000 for the period from 1 April 2015 to 30 June 2015. He has overlap profits of £5,000 to relieve.

His terminal loss for 2015/16 is £13,500 ((9/12 x £10,000) - £16,000 - £5,000).

He makes profits of £9,000 for the year to 31 March 2014 (taxed in 2013/14) and £25,000 for the year to 31 March 2013 (taxed in 2012/13).

He claims terminal loss relief.

The loss is set first against 2014/15 (£10,000) with the remaining £3,500 being set against the profits of 2013/14.SaveSave

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