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HMRC internal manual

Business Income Manual

Trade losses - types of relief: relief against chargeable gains - computation of relief

S261B Taxation of Chargeable Gains Act 1992 (TCGA 1992)

Relief for losses under S261B is calculated in four steps.

STEP 1: The trading loss

This is simply the amount of the trading loss comprised in the claim - this may originate from two different tax years, a claim for one tax year’s loss under S64(2)(a) Income Tax Act (ITA 2007) and one for the loss arising in the following tax year under S64(2)(b) ITA 2007.

STEP 2: The relevant amount

The ‘relevant amount’ is the excess of ‘the trading loss’ (step 1) over aggregate income for the year of claim, less any losses already given elsewhere. In formal terms, the trader makes a claim to determine this amount in the notice of claim under S64 ITA 2007, although in practice a combined notice is not required and a separate claim made within the time limit for a Section 64 claim should be admitted. A S261B TCGA 1992 claim may be made even though there is no income for the year of claim to justify the making of a claim under Section 64.

The rules in S42 Taxes Management Act 1970 apply for determining the ‘relevant amount’. The significance of this is that it allows a point in time to be established by reference to which the claim is fixed; see step 4 below. In the usual case this will simply be when the claim can no longer be varied and after any appeal procedure has finally been concluded.

STEP 3: The maximum amount

The ‘maximum amount’ is the amount on which the claimant would be chargeable to Capital Gains Tax for the year of claim. In calculating this amount relief due under S261B TCGA 1992 and the Capital Gains Tax annual exempt amount are to be disregarded. The ‘maximum amount’ is therefore equal to chargeable gains net of all allowable losses, including those brought forward (or, exceptionally, carried back). It follows that trading losses will not be treated as allowable losses to the extent that capital losses are available to cover gains. Nor can they actually create a capital loss available for carry forward.

STEP 4: Trading losses treated as allowable losses

The ‘relevant amount’ is treated for Capital Gains Tax purposes as an allowable loss accruing to the claimant in the tax year against which it is to be offset, subject to limitation by reference to the ‘maximum amount’ (step 3).

It follows that the trading losses treated as allowable losses are given in priority to capital losses brought forward (or, exceptionally, carried back); this may be significant, bearing in mind the provisions of S3(5) TCGA 1992 in relation to the deduction of the annual exempt amount. See CG18030 and BIM85040 Example 3.