Relief for Trading Losses with Capital Gains

There are three ways in which Trading Losses can be set-off:

1. Set against total profits in the current accounting period. CTA 2010, s.37(3)(a)
2. Carry back and set against total profits in the preceding 12 months. CTA 2010, s.37(3)(b)
3. Carry forward and set against next available future trading profits from the same trade. CTA 2010, s.45(4)

Graphical representation

 

Green arrow shows what can be done.

Red arrow shows what cannot be done.

 

Example below explains it further:

Say ABC Ltd has been trading for a number of years and below given is the Trading losses and Capital Gains figures for a period of 3 years.

                                                Year 1                   Year 2                   Year 3

Trading Loss (TL)                (30)                        (20)                        (100)

Capital Gains (CG)                 0                              40                           80

 

Computation of Taxable Income

Year 1

Trading Loss                                       £30

Carried forward Loss                      £30

 

 

Year 2

Trading Loss                                       (20)

Capital Gain                                        40

Net taxable Income                           20

Carried Forward Loss                      30

CG cannot be set off against carried forward TL so ABC Ltd pays tax on £20 and carries forward £30 of losses.

 

Year 3

Capital Gain                                        80

Trading Loss                                       (80)    Only (80) utilised out of (100) for Year 3 rest carried back below

Net taxable Income                          Nil

Carried Forward Loss                      30

Carried back loss                              20

 

Carried back loss can enable ABC to claim back tax paid in Year 2.

 Contributions
A special thank you to following individuals and organisations:

• ICAEW and KAPLAN  for creating an excellent study manuals.
• My colleague Neel to pose the question in a practical format.
• My colleague Gagan in discussing and crystallizing the graph.