ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL The amount that may be treated as a capital loss
Section 72 of FA 1991 permits a trading loss to be treated as a capital loss to the extent that there is insufficient income against which to set off the trading loss in a claim under section 380 of ICTA.
Section 72 restricts the amount of a trading loss capable of being treated as a capital loss, to the:
“amount …which is available for relief under [section 380].”
This means that any restriction set on relief under section 380 is also set on relief under section 72.
For an individual who is a limited partner at some time during a tax year section 117(1) of ICTA sets a restriction on the amount of a trading loss that can be set off under section 380 against the individual’s income for a tax year.
The restriction is that the loss can only be set against:
Therefore, in the case of the individual who is a limited partner, the loss is “available for relief” under section 380 for the purpose only of being set against income of the trade concerned or otherwise up to L.
Applying this restriction to relief for the loss under section 72 results in that relief being subject to the overall limit of L as well.
The amount of any income from the trade concerned is ignored for this purpose. Any part of the loss that is outside L cannot be relieved under section 72, even if it could have been set against income from the trade but for some reason was not, eg, because other reliefs were set against the income. This approach is necessary to give full effect to the restriction that any part of the loss that is outside L can be used under section 380 only for the purpose of being set against income from the trade concerned.
It would be anomalous for section 72 to transform into a generally available capital loss any part of a trading loss which can only be set against income from the trade concerned.
The same considerations apply to section 72 in the case of restrictions on the use of trading losses under section 380 involving either members of limited liability partnerships (section 117 of ICTA as applied by section 118ZB of ICTA) or non-active partners (section 118ZE of ICTA).
They also apply in the case of the restrictions set by sections 118ZL(1) (partnerships exploiting films) and 391 (losses from trade etc carried on abroad) of ICTA on the use of losses under section 380. These sections provide that certain trading losses can only be set against specified income. That is, the losses are “available for relief” under section 380 for the purpose only of being set against the specified income. Giving full effect to these restrictions results in no relief being available under section 72 for losses covered by them.
Sections 95(2), 104(3), 107(4), 110(3) and 115(3) now set out expressly the interaction between these restrictions on trade loss relief and the treating of trading losses as capital losses. Sections 109(1) and (3) and 113(1) and (4) and Schedule 2 Part 5 (members of LLPs and non-active partners: carry forward of losses) are consequential on the changes in sections 107 and 110.