Sole trader losses on cessation

By Tolley

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

  • Sole trader losses on cessation
  • Terminal loss relief
  • Post cessation losses
  • Losses remaining at incorporation

For restrictions relating to losses incurred by sole traders using the simplified cash basis, see the Simplified cash basis for small businesses guidance note. A sole trader using the simplified cash basis can carry back losses under the terminal loss relief rules and also carry forward losses for use against income arising from a company that the trade has been transferred to.

Terminal loss relief

If a taxpayer’s trade, profession or vocation ceases and has incurred a ‘terminal loss’, then the loss can be deducted from any trading profits in the tax year of cessation and carried back to the three preceding tax years. Losses must be relieved against later years first and are offset against profits of the trade, profession or vocation (after capital allowances).

ITA 2007, ss 89–94

The terminal loss is the loss made in the 12 months ending with the date of cessation. This may not be the same as the loss in the final accounting period, because cessation accounts are rarely exactly 12 months long. Therefore, an apportionment of profits or losses may be required in order to compute the terminal loss. Strictly, the terminal loss is computed as the aggregate of the loss for the period 6 April to cessation, and the period from 12 months before cessation to 6 April. See Example 1.

ITA 2007, s 90

Any unrelieved overlap profits should be included in the computation of the terminal loss, see Example 2 and Example 3. Unrelieved overlap profits may therefore create a terminal loss in an otherwise profitable situation.

If the amount of the loss cannot be fully relieved by way of a terminal loss relief claim then relief may be claimed in another way.

More on Relief for trading losses: