Understanding loss relief

When a business makes a loss, the tax relief available depends on whether it’s an unincorporated business or a company, and where the business is in its life cycle.

Established trading businesses

For established unincorporated businesses, trading losses in a particular tax year can be offset against other income in the same tax year or the previous tax year (see Section 64 Income Tax Act 2007 for more details). If a taxpayer makes a loss relief claim under Section 64, but hasn’t used the losses in full, they can treat the loss as if it were a capital loss, under Section 71 Income Tax Act 2007 . This will offset against any capital gains arising in the same tax year as the loss relief claim. This means that a trade loss of an unincorporated business in the 2024/25 tax year can be offset against total income and then capital gains from the 2024/25 tax year, and/or total income and then capital gains in the 2023/24 tax year.

For established trading businesses in companies, trading losses can be offset against total profits (including capital gains) in the same accounting period and then carried back for the previous 12 months against total profits (including capital gains) before qualifying charitable donations are deducted. It is important to be aware that, unlike unincorporated businesses, trading losses in a company must be offset against the current accounting period first before carrying back.

Where a business decides not to make a claim for offsetting trading losses in the current/previous year, losses will normally be carried forward and offset against future trading profits from the same trade under Section 83 Income Tax Act 2007 (unincorporated businesses). Alternatively, in the case of companies, losses post-April 2017, can be carried forward against total profits under Section 45A Corporation Tax Act 2010 . There can be some restrictions on the use of losses carried forward in companies and trade losses pre-April 2017 that are brought forward must be offset against future profits from the same trade per Section 45B Corporation Tax Act 2010 .

Companies who are members of a group have the option to make a group relief claim under Section 97 Corporation Tax Act 2010. Unlike many other loss reliefs, it is possible to make a partial group relief claim, which can be helpful for tax planning purposes.

In the case of partnerships, each partner makes their own decisions in respect of their loss relief. The decisions of one partner do not affect the tax relief for the losses attributable to any other partner in the partnership.

Businesses in the early years of trade

In addition to the loss reliefs available for established trading businesses, unincorporated businesses in the first four years can be relieved against the trader’s other income of the three tax years preceding the year of loss. No partial claims are allowed - Section 72 Income Tax Act 2007 gives more details. This option is not available to companies as the company did not exist before it was incorporated.

Losses at the time of incorporation of an unincorporated business can be offset against the income received by the shareholder from the company.

Restrictions on the amount of loss claims

For unincorporated businesses, there is a cap on the loss relief available under Section 24A Income Tax Act 2007. Sideways loss relief is restricted to the greater of £50,000 and 25% of the ‘adjusted total income’. It is also necessary for the trade to be operated on a commercial basis – additional loss restrictions apply to both unincorporated businesses and companies for farming businesses making losses before capital allowances over several years; this is known as the hobby farming rules).

Terminal trading losses

When an unincorporated business that is a continuing trade makes a loss on cessation, Section 89 Income Tax Act 2007 allows for losses in the final 12 months of trade to be offset against other income in the final tax year and the three previous tax years.

Section 39 Corporation Tax Act 2010  makes similar provisions for companies for losses in the final 12 months of trading. The usual 12-month carry back period is extended to 36 months.

Tax planning

In the case of unincorporated businesses, trading loss relief may result in a taxpayer’s Personal Allowance being wasted - as loss reliefs are available on an all or nothing basis.

In some cases, it may be desirable to disclaim capital allowances to reduce the losses. This would be particularly relevant to minimise the loss of the Personal Allowance.

Exceptions to loss relief rules

The above loss provisions are the position that would normally apply. As ever with tax, there can be exceptions, so it’s important to review the legislation closely before making any claims.