loss reliefa trading loss made by a self-employed individual can be relieved in a variety of ways. First, it maybe carried forward and set off against future profits of the same trade. Alternatively, it can be relieved against the TOTAL INCOME of the tax year in which the loss was made or in the previous tax year, or in both of those years. The trader decides whether to claim for one of the available years, or both of those years, or neither. However, a claim must relate to as much of the loss as can be relieved, even if this leaves insufficient income to absorb personal allowances. If the effect of this claim is to reduce the total income to nil, then a further claim can be made to set any unrelieved part of the loss against any CAPITAL GAINS for the year of loss. A special relief applies for losses made in the first four tax years of trading and allows the loss to be carried back against the total income of the three previous tax years, beginning with the earliest year. The trader cannot specify which years the relief is to be given in or the amount of the relief which is to be applied as the maximum possible relief must be given, even if this will waste personal allowances. Once a trade ceases, losses can no longer be carried forward and therefore terminal loss relief is available for the losses incurred in the final twelve months of trading. This allows the losses to be carried back against the trading profits of the previous three tax years working backwards through time.
Trading losses of companies are broadly dealt with in the same way as above for individuals. However, there is no special relief for the first four years of trading and if a claim is made to set off losses against other income, it is automatically set against the company's CAPITAL GAINS. If the company is a member of a group, the loss can be surrendered for use by another group member against its profits of the same accounting period. The two companies can decide how much of a loss is to be surrendered up to a maximum equal to the lower of the losses of the surrendering company and the profits of the claimant company.
For losses on property which is rented out, see RENTAL LOSSES.