Sole trader trading losses are a popular area in the Tax and Advanced Tax exams.

The trading loss must first be offset against total income in either the current tax year and the previous tax year. The claim is an all or nothing relief and cannot be restricted to preserve the personal allowance.  As a result, the personal allowance is sacrificed.

In the exam, you should not recommend claiming the loss relief if the personal allowance is lost.

After offsetting the loss against total income, the claim can be extended to cover the capital gains of the same tax year. Once again, the claim cannot be restricted to preserve the annual exemption.

Finally, the remaining trading loss is carried forward against future total profits of the same trade . Partial claims are permitted but the disadvantage here is tax relief is given in the future.

If the trade of the sole trader ceases, then the loss cannot be carried forward anymore.

Instead, terminal loss relief is available, and the loss can be carried back 36 months LIFO against trading profits to generate a large tax refund.

The important technical aspect here is to compute the loss available as the loss from the 6th April to the date of cessation, the balance of the loss for the remainder of the 12 months preceding cessation and finally any overlap profits.

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