Trading losses ― cap on unlimited income tax reliefs

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Trading losses ― cap on unlimited income tax reliefs
  • Introduction
  • Reliefs included in the cap
  • Relief for losses excluded from the cap
  • Adjusted total income
  • Reliefs caught by the cap
  • Planning points

Relief for trading losses may be subject to a number of anti-avoidance measures. One of these is the cap on unlimited tax reliefs, which applies to losses incurred through a sole trader business or partnership. This is a measure that needs to be considered when conducting tax planning work for unincorporated businesses that involves utilising losses.

Introduction

The cap on unlimited income tax reliefs restricts relief for trading losses and property losses, where these are used against general income.

ITA 2007, s 24A

This is done by limiting the effect of certain reliefs, including loss reliefs, which are given against general income at Step 2 of the income tax calculation.

ITA 2007, s 24

The cap only applies where the taxpayer claims more than £50,000 in reliefs in any one year. It acts to limit the relief to the greater of:

  • £50,000, or
  • 25% of income

Example 1 and Example 2 illustrate how the limit of the relief is calculated.

The person’s individual relief cap for that year is calculated and compared with the total amount of relief for that year that falls within the cap. If the total reliefs are within the amount of the cap, full relief is available in that year. If the total reliefs exceed the amount of the cap, the excess reliefs will be carried forward or lost.

Therefore, in order to apply these provisions, it is necessary to determine:

  • the amount of reliefs for the year
  • the individual relief cap by calculating the ‘adjusted total income’ for the tax year

See Example 3.

Reliefs included

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