A lot of businesses have made significant losses in the current recession and will continue to make losses for a while yet. Where those losses are made outside of a company they can generally be set-off against the entrepreneur's other income, or in some cases their gains, without limit. There are restrictions on the use of losses made from a business where the trader is not actively involved. Losses are often created by the amount of interest the business has to pay to the bank.
From 6 April 2013 the Government is proposing to cap the amount of loss relief and interest relief given in any one tax year to the higher of:
- £50,000; and
- 25% of the taxpayer's income.
The restrictions on losses and interest may affect business decisions you have taken, or which you are about to make in the next few months. Here are five ways the proposed restrictions could affect you:
1. Where you have significant losses in a current accounting period which will end in the 2013/14 tax year, you may be thinking of selling an asset for a gain to off-set those losses. Such plans need to be reviewed as your total loss relief will be restricted in 2013/14.
2. Partners who currently pay significant amounts of interest on their partnership loans may need to restructure those loans before 6 April 2013, to ensure their loan interest does not exceed the greater of £50,000 or 25% of their income.
3. If you are planning to invest in EIS shares or SEIS shares in the knowledge that if the enterprise doesn't work out, you will get income tax loss relief on the capital invested, you need to know that your loss relief may be restricted.
4. Where you have already subscribed for shares in an unquoted trading company which is sliding into insolvency, you may need to make a negligible value claim for the value of those shares, to ensure the loss falls in the tax year 2012/13 and is not restricted from 2013/14.
5. If you are planning to set up a new business which is going to make significant losses in the first couple of years, we need to discuss the structure of the proposed new businesses to ensure the losses are used as quickly as possible.