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

Under ITA07/S89, a person (individual, partner or trustee) who makes a terminal loss in a trade, profession or vocation which is permanently discontinued may claim relief for the loss as follows:

• against profits of the same trade etc for the year of cessation, and
• by reference to profits of the same trade for the three tax years prior to that in which the discontinuance occurs.

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

ITA07/S92 provides that, in giving relief under the section, investment income which would have been taken into account as a trade receipt if it had not been subjected to tax under other provisions may be treated as though it had been assessed as a trade receipt, see BIM40800 onwards.

The amount of the terminal loss available for relief is defined in ITA07/S90. 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 and any unused overlap relief:-

1. The loss made in the year of cessation;
2. The loss made in the part of the penultimate year beginning 12 months before the date of cessation.

Where the result at either element 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 June 2013. The accounts for the last two years are as follows:

12 months to 30-09-12 profit £12,000.

9 months to 30-06-13 loss (£ 9,000).

In addition there is unused overlap relief of £2,500 to be taken into account. These will augment the loss of the final year, 2013-14.

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

The trader has two options:

• An ITA07/S64 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 ITA07/S89 claim can be made as follows:
• ITA07/S90(1)(a): loss of final year, 2013-14:

The balance of any loss not relieved under ITA07/S89 (in this example £3,000) can be claimed under ITA07/S64.