Income Tax Relief for Farm Trading Losses

Published on 7th March 2019

Farming is an unpredictable business and a year’s hard work does not always produce a profit. While losses are always disappointing, there may be some consolation if tax relief can be secured.

The principal reliefs are to offset the farm trade loss against:

  • Other income (and thereafter capital gains) of the current tax year.
  • Other income (and thereafter capital gains)of the previous tax year.
  • Future trading profits of the same business.

Relief is usually claimed against other income (where it exists!) to secure immediate tax relief. Relief claimed against future profits will only ever achieve tax relief if and when the farm becomes profitable.

Some other tax measures can help utilise losses more efficiently:

Around the commencement or cessation of a trade, a taxpayer can set losses against up to 3 previous years’ income.
A farm averaging claim can affect loss reliefs (even though losses are excluded in calculating the averaging adjustment).
A tax loss can be reduced by claiming reduced capital allowances. This can sometimes change wasted loss into future tax relief.

Loss relief claims are subject to detailed rules and restrictions, including:

a) Relief against other income is only available where the trade is undertaken in pursuit of profit.
b) There is no relief for a farming loss against other income if tax losses (before capital allowances) have also been incurred for the 5 preceding tax years. (The 5 year limit may sometimes be extended to up to 11 years for a stud farm.)
c) For a sole trader or a partner who works for less than 10 hours a week in the farm business, loss relief against other income is restricted to £25,000.
d) Income tax reliefs are capped at the higher of £50,000 or 25% of total income.

Capital gains tax losses
An individual’s capital losses are automatically set against capital gains in the same tax year (including gains that would otherwise be covered by the annual exemption). Any excess capital losses are carried forward for relief against future years’ capital gains. Some dairy farmers currently have carried forward capital losses from purchased milk quota, which was abolished on 31 March 2015.

For more information on Income Tax Relief, please contact us 01392 211 233.