F6-chapter 10.pdf

Chapter 10 Trading losses 1. Loss relief against net income - A trading loss can set against Total Income before personal allowance (net income) in the loss-making year and/or preceding year - Personal allowances may be wasted as a result of this claim - Unrelieved losses can be carried forward under “Carry forward loss relief”. Trading Loss Relief Trading losses Loss Relief against net income Current Basis Period Previous Basis Period Previous BP Current BP Previous BP Current BP Total income before Personal Allowance Cap On Income Tax Relief ? If loss relief is claimed against total income the maximum that can be relieved is the higher of: a) ￡50,000; or b) 25% of a person’s total income (after deducting gross personal pension contributions.) ?This restriction does not apply to the loss relieved against profits of the same trade for the preceding tax year. 2. Carry forward loss relief - Trading losses can be relieved against future trading profits - Can be carried forward without time limits. Trading Loss Relief 3. Trading losses relieved against capital gains - Trading losses can set against capital gains for the loss-making year - The trading loss is first set against Net Income of the year of the claim, and only any excess of loss is set against capital gains of the year of the claim. Trading Loss Relief 4. Early trade loss relief - Trading losses incurred in the first 4 tax years of a trade can set against Total Income before personal allowance (Net Income) of the 3 tax years preceding the start of trade. - Applying the loss to the earliest year first (FIFO). - This claim is preferred than the first claim, because loss can be relieved much earlier. Trading Loss Relief Early trade loss relief 0-1-2-3 1 2 3 4 1 12 23 3 Start to trade Employee Self- employed Total Income Before Personal Allowance Trading loss 4. Early trade loss relief Example: Wang commenced in self –employment on 1 November 2012,