BIM75480 - Trading losses: types of relief: terminal loss relief

Under ICTA88/S388, a person (individual, partner or trustee) sustaining a terminal loss in a trade, profession or vocation which is permanently discontinued may claim to have the loss set off against profits of the same trade etc. on which tax has been charged for:

• the year of cessation, and
• the three tax years prior to that in which the discontinuance occurs.

The relief is to be given as far as possible against the profits for a later rather than an earlier year.

ICTA88/S388 (4) provides that, in giving relief under the section, investment income which would have been taken into account as a trading receipt for Case I purposes if it had not been subjected to tax under other provisions may be treated as though it had been assessed under Case I, see BIM40800onwards.

The amount of the terminal loss available for relief is defined in ICTA88/S388 (6). It consists of the sum of the following two elements in so far as relief has not otherwise been given in respect of any of them:

1. The loss sustained in the year of discontinuance;
   
   
2. The loss sustained in the part of the penultimate year beginning twelve months before the date of discontinuance.

Where the result at either 1 or 2 is a profit, that element is simply taken to be a nil profit for the purpose of computing the terminal loss.

Example: calculation of terminal loss relief

A business, which has been in existence for many years, has an annual accounting date of 30 September. The business ceases on 30-6-13. The accounts for the last two years are as follows:

12 months to 30-9-12 profit £12,000.

9 months to 30-6-13 loss (£9,000).

In addition there are overlap profits of £2,500 to be taken into account. These will augment the loss for 2013-14.

The assessable profits (before any loss relief) are as follows:

2012-13 £12,000 - ICTA88/S60 (3) (b)

2013-14 £ Nil - ICTA88/S63

The trader has two options:

• An ICTA88/S380 claim can be made for the 2013-14 loss. The amount that can be claimed is the loss of the final accounting period plus the overlap relief due: (£9,000 + £2,500) = £11,500, or
• An ICTA88/S388 claim can be made as follows:ICTA88/S388 (6)(a): loss of final year, 2013-14:

The loss for period 6/4/13 to 30/6/13 is (3/9 x £9,000) = £3,000 plus overlap relief = £2,500 = loss for 2013-14 £5,500

ICTA88/S388 (6) (c): loss of the preceding year, 2012-13:

The loss for period 1/7/12 to 5/4/13 is (6/9 x £9,000) = £6,000 less (3/12 x £12000) = £3,000 = loss for 2012-13 £3,000.

Total ICTA88/S388 (£5,500 + £3,000) = loss £8,500.

The balance of any loss not relieved under ICTA88/S388 (in this example £3,000) can be claimed under ICTA88/S380.