Terminal Loss Relief Explained

If you own a Limited Company and, for whatever reason have decided to stop trading and made a tax loss in your final accounting period, then you may be able to use the rules of corporation tax loss relief to generate a corporation tax refund.

Corporation Tax Losses

Under the normal rules of corporation tax, a trading company can carry forward trading losses to use against future profits indefinitely (with some restrictions on losses made pre 1 April 2017) or carry them back to the previous accounting period.

When a Limited Company stops trading they can apply the HMRC rules of terminal loss relief. These rules permit a slightly different use of a final accounting period tax loss, which could be quite valuable to some Limited Company owners.

Terminal Loss Relief

There are two options for using final corporation tax losses:

  1. Carry back the final period tax loss and set it against prior profits;
  2. Carry forward any previous unused tax losses from trading years without the restrictions on losses made pre April 2017 being applied.

How to Carry Back Terminal Losses

HMRC permits a Company to carry back final losses that occur in the last 12 months of trade and set it against corporation tax profits made in any or all of the previous 3 years up to the start of the final period the loss was made.

Here’s an example:

A Limited Company stops trading and its final accounting period is 1 January 2020 to 31 December 2020.

It would potentially be eligible to carry back losses 3 years using terminal loss relief to the accounting periods 2019, 2018 and 2017.

To claim to carry back losses the Limited Company would need to follow the additional HMRC rules, so it:

  • Must have the same trade in all three years;
  • Need to use the losses starting with the most recent year first (you can’t pick and choose with financial years you use);
  • Apportion the profit if any of the previous accounting periods are less than 12 months (if there was a change in accounting year end for instance).

How to Carry Forward Terminal Losses

Due to restrictions introduced by HMRC surrounding how losses made before 1 April 2017 are used against future profit, this can limit how a Limited Company that has stopped trading can make use of its prior losses.

To help, the business can apply the rules of terminal loss relief instead of the usual rules.

Under terminal loss relief, a Limited Company that has ceased trading can carry forward unused loses to the final accounting period.

Unused Losses can be used to reduce profits:

  • of the final accounting period;
  • for earlier periods up to 3 years before the end of the final accounting period.

Here’s an example:

A Limited Company stops trading and it’s final accounting period is 1 January 2020 to 31 December 2020.

The terminal loss period to carry forward any unused losses would start from 2018 up until the end of the final accounting period.

How to Claim Terminal Loss Relief

You must claim for terminal loss relief within 2 years from the end of the accounting period that you stopped trading. You can make your claim in:

  • your corporation tax return;
  • an amendment to the corporation tax returns;
  • a letter to HMRC.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.