Sole trader losses on cessation

Introduction

When a sole trader or partnership makes a loss, the trading income assessment (ie taxable profit for the year) is nil. Losses are generally computed in the same way as profits.

The loss relief claim(s) that are available depend on whether the trade has started within the last four years, or is a continuing trade or the trade has ceased.

This guidance note concentrates on claims that can be made for trading losses in the 12 months prior to cessation of the trade.

For a comparison of the various loss relief claims, see the Table ― trading loss relief summary.

HMRC has published a toolkit entitled ‘Income tax losses’, which aims to help reduce errors on tax returns. Use of HMRC’s toolkits should be proof of reasonable care.

Terminal loss relief is not included in the cap on unlimited income tax reliefs. This is because the anti-avoidance provision targets reliefs against total income rather than just against trading profits. For more information, see the Cap on unlimited income tax reliefs guidance note.

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 (ie a last in / first out (LIFO) basis) and are offset