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Readers' Forum
Replies to Queries — 3
Separate ways
Two brothers, trading in partnership, have fallen on hard times and would be in a very serious situation were it not for the fact that they owned the freehold business property, which they have just sold for approximately £500,000. This has enabled them to settle their debts and face the future.
Readers' Forum
Replies to Queries — 3
Separate ways
Two brothers, trading in partnership, have fallen on hard times and would be in a very serious situation were it not for the fact that they owned the freehold business property, which they have just sold for approximately £500,000. This has enabled them to settle their debts and face the future.
The partners have decided to go their separate ways. Partner A will carry on the existing business and Partner B will try to develop a product started by, but which was not the main activity of, the partnership.
Partnership accounts to 30 June 2002 and 2003 show losses of £20,000 and £40,000 respectively and the final accounts to 30 June 2004 show a loss of £60,000. The 'sunshine in the picture' is the business property, which was owned for over two years. There is a gain of £300,000 on disposal and each partner has 75 per cent business asset taper relief on his half share. What are the partners' options regarding the income tax losses for the last three years, please? Assume for this purpose that they had no other income in 2002-03 and 2003-04 and in 2004-05 profits in the new ventures are likely to be £10,000 each.
Finally, can the former partners elect to have the written-down value on plant and machinery as at 30 June 2004 transferred to the two separate ventures? If so, would the situation be any different if the brothers included their respective wives as partners in the new ventures?
(Query T16,498) — Sunshine.
It is appropriate to summarise the alternative ways the legislation allows relief for trading losses, then to apply them to 'Sunshine's' circumstances. (References are to TA 1988 unless otherwise stated.)
S 385 allows a trading loss to be carried forward and set off against future trading profits only.
S 380 allows the trading loss to be relieved against the total income of the year of the tax loss and/or the previous tax year. FA 1991, s 72 extends this to allow set off against capital gains.
Ss 388 and 389, terminal loss relief, allow the loss to be relieved against the final tax year and the trading income of the previous three tax years (latest first).
S 381 loss relief relates to new businesses only, so will not apply.
These claims are not necessarily mutually exclusive as claims can be made under ss 388, 389 and 380. It should also be noted that the calculation of the loss under ss 388 and 389 is strictly for the last twelve months trading, unlike s 380 which is calculated by reference to the accounting period. In these particular circumstances, both calculations would give the same figure. Any loss will be increased by the addition of unrelieved overlap relief — there may well be a substantial amount of transitional relief if the business was established and making profits when self assessment was introduced. These would be the profits for the period 1 July 1996 to 5 April 1997 (before capital allowances).
The options and recommendations on how to use the losses are as follows:
(1) Loss to 30 June 2002 — £20,000. As there are no future profits or other income for the year, the only option is to claim for the loss to be relieved against the trading income for the previous year, i.e. 2001-02. (N.B. Any claim must be made by 31 January 2005.)
(2) Loss to 30 June 2003 — £40,000. Subject to the possibility of one of the partners persuading the Revenue that the business is continuing, this cannot be relieved because there is no income in the current, previous or following year against which s 380 or s 385 claims can be made.
(3) Loss to 30 June 2004 — £60,000. No definite advice can be given without knowing the level of income for 2001-02, after the loss relief calculated under (1) above. The final decision should be made by comparing the tax refund arising because of such a claim with the tax relief due if a claim was made under s 380 for the loss to be relieved against other income for 2004-05; i.e. the capital gain and new business profits. The s 380 claim for 2004-05 is likely to be the more advantageous as most of each partner's income will be removed from charge to tax.
An election to transfer the plant and machinery at written down value can be made. This is not restricted to the transfer of trading activities to a limited company. The transfers are all between connected parties, so market value is not substituted, if the election is made.
