Budget Notes

BN63 RESTRICTIONS ON TRADE LOSS RELIEF FOR INDIVIDUALS

Who is likely to be affected?

1. Individuals who carry on a trade but spend an average of less than 10 hours a week on commercial activities of that trade.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008:

•    to counteract the use of contrived arrangements that generate trade losses which may be claimed as sideways relief or capital gains relief ("sideways loss relief") by an individual, other than a partner, carrying on a trade in a non-active capacity; and

•    to amend the definition of a non-active partner for the purpose of restrictions to sideways loss relief.

Operative date

3. These changes will have effect on and after 12 March 2008.

Current law and proposed revisions

4. Individuals who are carrying on a trade can, subject to certain restrictions, set off their trading losses against other income and gains. This is commonly known as sideways loss relief.

5. Section 26 of and Schedule 4 to the Finance Act 2007 introduced legislation to counteract the use of partnership arrangements that generate trade losses for use as "sideways loss relief" by a non-active or limited partner.

6. Since then HM Revenue & Customs has seen, through the tax avoidance disclosure regime and otherwise, evidence of arrangements of a similar nature based on individuals acting as traders on their own account rather than as partners.

7. Legislation will be introduced in Finance Bill 2008 to restrict the amount of sideways loss relief that can be claimed by an individual, other than a partner, carrying on a trade in a non-active capacity. Where a loss arises to an individual carrying on a trade in a non-active capacity as a result of tax avoidance arrangements made on or after 12 March 2008, no sideways loss relief will be available for that loss. Otherwise there will be an annual limit of £25,000 on the total amount of sideways loss relief that an individual may claim from trades carried on in a non-active capacity.

8. For these purposes an individual, other than a partner, carries on a trade in a non-active capacity where the individual spends an average of less than 10 hours a week, in a relevant period, personally engaged in activities of the trade carried on commercially and with a view to the realisation of profits from those activities.

9. The restrictions will not apply to losses that derive from qualifying film expenditure, broadly losses that derive from film reliefs in sections 137 to 140 of the Income Tax (Trading and Other Income) Act 2005, or to losses of a Lloyd's underwriting business.

10. Transitional rules will apply to the computation of losses subject to the annual limit where these arise for an individual's basis period which begins before 12 March 2008 and ends on or after that date.

11. Legislation will also be introduced to align the meaning of non-active partner for the purposes of restrictions to sideways loss relief with the meaning of non-active capacity.

12. Draft legislation and explanatory notes have been published today on the HM Revenue & Customs website.

Further advice

13. If you have any questions about this change, please contact Peter Lees on 028 9093 9812 (email: peter.lees@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk