Inactive traders must be careful about claiming loss relief
People working at a trade and generating losses to set off against their other income should beware they don’t fall foul of new loss relief restrictions to be implemented in this year’s Finance Bill.
The purpose of the legislation is to counter an avoidance technique, whereby trading losses are generated by an individual who does not pursue their trade very actively, and claimed as so-called “sideways loss relief” against their other income and gains. New legislation in the Finance Bill, set to become law in the course of July, will restrict the amount of sideways loss relief that can be claimed by an individual who is “carrying on a trade in a non-active capacity”. This is defined as cases where the individual spends less than 10 hours per week “personally engaged in activities of the trade carried on commercially and with a view to the realisation of profits from those activities” – i.e. the taxpayer has to pass a test of commerciality in terms of their activities and prove the given number of working hours in order for sideways loss relief to be available to them beyond the restricted level.
The annual cap on the amount of sideways loss relief available to individuals in this position will be £25,000 – unless HMRC feels they are carrying on a trade in a non-active capacity specifically as part of tax avoidance arrangements, in which case no relief will be available, although as ever the exact basis on which this conclusion will be reached will vary from case to case.
The measures will come into force with effect as from 12 March 2008.