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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Trade losses - types of relief: relief against chargeable gains - examples

S261B Taxation of Chargeable Gains Act 1992 (TCGA 1992)

A trader returns the following income, losses etc for 2012-2013

  Example 1 Example 2 Example 3
       
Taxable income £ 40,000 £ 30,000 £ 30,000
Trading losses current year £ 50,000 £ 50,000 £ 92,000
Chargeable gains £100,000 £100,000 £100,000
CG Allowable losses current year £ 45,000 £ 45,000 £ 45,000
CG Allowable losses brought forward £ 40,000 £ 40,000 £ 3,000
CG Annual exempt amount £ 10,600 £ 10,600 £ 10,600

Claims are made under:

  • S64(2)(a) Income Tax Act 2007 in respect of the current year trading losses.
  • S261B TCGA 1992.

No relief is otherwise allowed in respect of the trading losses.

Example 1 - Relevant amount not limited by reference to maximum amount

Step 1 The trading loss = £50,000
     
Step 2 The ‘relevant amount’ £50,000 - £40,000 = £10,000
Step 3 The ’maximum amount’ £100,000 - (£45,000 + £40,000) = £15,000
Step 4 The ’relevant amount’ is not limited by reference to the ‘maximum amount’ and trading losses of £10,000 are treated as allowable losses  

The capital gains computation is:

Chargeable gains   £100,000
     
Allowable losses    
current year £45,000  
S261B TCGA 1992 £10,000  
brought forward £ 34,400* £ 89,400
    £ 10,600
Annual exempt amount   £ 10,600
    nil

*Allowable losses brought forward restricted by virtue of S3(5B) TCGA 1992. Allowable losses carried forward £5,600.

Example 2 - Relevant amount limited by reference to maximum amount

Step 1 The trading loss = £50,000
     
Step 2 The ‘relevant amount’ £50,000 - £30,000 = £20,000
Step 3 The ‘maximum amount’ £100,000 - (£45,000 + £40,000) = £15,000
Step 4 The ‘relevant amount’ is limited by reference to the ‘maximum amount’ and trading losses of £15,000 are treated as allowable losses  

The capital gains computation is:

Chargeable gains   £100,000
     
Allowable losses    
current year £45,000  
S261B TCGA 1992 £15,000  
brought forward £ 29,400* £ 89,400
    £ 10,600
Annual exempt amount   £ 10,600
    nil

*Allowable losses brought forward restricted by virtue of S3(5B) TCGA 1992. Allowable losses carried forward £10,600.

Example 3 - Part of annual exempt amount ineffective

Step 1 The ‘trading loss’ = £92,000
     
Step 2 The ‘relevant amount’ £92,000 - £30,000 = £62,000
Step 3 The ‘maximum amount’ £100,000 - (£45,000 + £3,000) = £52,000
Step 4 The ‘relevant amount’ is limited by reference to the ‘maximum amount’ and trading losses of £52,000 are treated as allowable losses  

The capital gains computation is:

Chargeable gains   £100,000
     
Allowable losses    
current year £45,000  
S261B TCGA 1992 £52,000 £ 97,000
    £ 3,000
Annual exempt amount   £ 3,000
    nil

Allowable losses brought forward £3,000 are carried forward unused. Part of the annual exempt amount, £7,600 (that is, £10,600 - £3,000), is ineffective. This situation can occur only where the allowable losses brought forward fall short of the annual exempt amount.