BIM85625 - Farming losses: operation of five year rule

S67, S70 Income Tax Act 2007

»Ê¹ÚÌåÓýapp loss incurred in a tax year is caught by the five year rule where a loss computed without regard to capital allowances is incurred in each of the five preceding tax years. »Ê¹ÚÌåÓýapp year of commencement is not counted for this purpose so, in the case of a new business which makes losses consistently, the loss of the seventh tax year is the first to be caught.

Example

Betty commenced trading as a farmer on 6 April 2001 and makes up thir accounts annually to 5 April. »Ê¹ÚÌåÓýappir results were as follows:

Period of account

Trade profit or loss (excluding CA)

Capital allowances

Year ended 5.4.02

Loss £1600

-

Year ended 5.4.03

Loss £500

-

Year ended 5.4.04

Loss £1250

-

Year ended 5.4.05

Loss £3040

£1240

Year ended 5.4.06

Loss £4030

£930

Year ended 5.4.07

Loss £3600

£1400

Year ended 5.4.08

Loss £5750

£1050

Year ended 5.4.09

Loss £4750

£850

Year ended 5.4.10

Loss £5900

£700

Year ended 5.4.11

Profit £900

£1300

Year ended 5.4.12

Loss £7100

£1000

Year ended 5.4.13

Loss £8480

£880

Betty claimed trade loss relief against general income for all available years. Relief was available or restricted as follows:

Year of assessment

Relief available

Explanation

2001-02

£1600

Relief is available on the full loss.

2002-03

£500

Relief is available on the full loss.

2003-04

£1250

Relief is available on the full loss.

2004-05

£4280

Relief is available on the full loss.

2005-06

£4960

Relief is available on the full loss.

2006-07

£5000

Relief is available on the full loss. Although a loss was incurred in each of the five preceding years, 2001-02 is disregarded for the purpose of the five year test as it was the year of commencement.

2007-08

Nil

A loss was incurred in each of the five preceding years, which do not include the year of commencement. »Ê¹ÚÌåÓýapp five year rule applies and trade loss relief against general income is denied

2008-09

Nil

»Ê¹ÚÌåÓýapp five year rule still applies and trade loss relief against general income is denied.

2009-10

Nil

»Ê¹ÚÌåÓýapp five year rule still applies and trade loss relief against general income is denied.

2010-11

Nil

In this year Betty made a profit before capital allowances but a loss after capital allowances had been claimed. As the trade made a loss in the tax year, and a loss was made in the previous five tax years, Betty remains unable to claim trade loss relief against general income.

2011-12

£8100

»Ê¹ÚÌåÓýappre is a loss before capital allowances in this year but in the previous tax year Betty made a profit before capital allowances. »Ê¹ÚÌåÓýapp run of consecutive losses computed without regard to capital allowances is therefore broken. A new five year period of consecutive losses will need to be built up before the five year rule can bite again. Relief is available on the loss without restriction.

2012-13

£9360

Relief is available on the full loss.