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Terminal losses for the self-employed

Source: HM Revenue & Customs | | 23/08/2017

There are a number of different reliefs available to the self-employed or members of a trading partnership that suffer tax losses, and a number of ways these losses can be used.

One commonly used relief, is terminal loss relief. This relief is available to businesses that suffer a loss in the last year of trade. Terminal loss relief allows for the carry back of any trading losses that occur in the final 12 months of trading to be set off against profits made in any or all of the previous three tax years.

Terminal loss relief can only be offset against the profits of the same trade. Any loss must be offset first against the profits of most recent years before being carried back to earlier years, this is commonly known as the LIFO (last in, first out) basis. A claim needs to be made within four years from the end of the tax year in which the business ceases, for the 2016-17 tax year, the time limit for making a claim is 5 April 2021.

Planning note:

Using terminal loss relief can help you recover any drain of cash flow occasioned by the final year's trading losses, as any carry back of losses should trigger tax refunds for those earlier years. If Income Tax was paid at higher rates, 40% or more of losses can be recovered in this way. Claims need to be carefully considered in order to maximise these benefits.