Making the best of things – how to claim relief for tax losses

18 February 2021

Sadly, many people have suffered financial losses in 2020/21. Tax relief cannot wholly compensate for the hardship this causes, but it can soften the blow, and it is worth understanding the ways in which losses can be used.

Sole traders and individuals in partnership

Traders with a loss for an accounting period ended in the 2020/21 tax year may wish to consider claiming relief straight away. Trading losses incurred in 2020/21 in a trade carried on solely or in partnership may be claimed against other income for the year or carried back to set against 2019/20 income. Where no income is available against which to claim, relief can be claimed against capital gains in those years. Relief can be claimed on a standalone basis, allowing repayment of 2019/20 tax already paid without the need to wait until 2020/21tax returns are submitted.

Loans to traders

If money has been loaned, which has been used by the borrower wholly for trading purposes, and it is now clear that it will never be repaid, it may be possible to claim a capital loss, which could be set against capital gains for the year of the claim or up to two years earlier if the funds were also irrecoverable at that time.

Failed companies

If it becomes clear that an investment in a company has become worthless, there is no need to wait for the company to be liquidated before claiming a capital loss. It is possible to make a ‘negligible value claim’ which treats  the investment as if it was sold when it became worthless, allowing the loss to be claimed straight away.

Negligible value losses are normal capital losses which can be used in the year or carried forward. However, if the shares concerned were unlisted trading company shares meeting certain criteria, a claim can instead be made to set the loss against income in the year of the deemed disposal or the previous tax year, potentially increasing the rate of tax relief received to as much as 45 per cent.

Loss-making investments in enterprise investment scheme (EIS) companies often qualify for this income tax offset, so it is worth keeping an eye on the performance of such investments. Special rules apply where income tax relief has already been claimed on making an EIS investment, and advice should be taken on how much additional relief can be claimed.

Be careful

Loss reliefs are only available where relevant conditions are met, so it is best to take advice. For example, there are limits on the amount of relief which may be claimed for trading losses against other income or gains in a tax year and complex interactions between different rate bands and types of income and reliefs. It is worth spending time planning the best use of losses to ensure the value of available reliefs are maximised.

Poor utilisation of losses may actually create additional liabilities. For instance, for gift aid donations, the charity will reclaim a further 25 per cent  from HMRC and this needs to be matched to tax paid by the relevant taxpayer in the same tax year. If loss relief claims reduce a tax liability on income and gains so there  is  insufficient tax paid in the year to cover this reclaim, a payment will need to be made to HMRC to make up the shortfall, effectively wasting the loss.

If you have losses, a claim to carry them back to 2019/20 or offset them against other income or gains could make a big difference to your financial position. Because the rules are so complicated it is worth talking to your tax adviser to consider your options, but in many cases tax relief can help you to make the best of a bad situation.