Trading Losses – Non-active traders Print

Where the individual is considered to be non-active, the amount of sideways loss relief he can set-off against other income is restricted to a total trading loss of £25,000 derived from all partnerships or trades conducted by the individual which are considered to be non-active. Any partnership losses up to the £25,000 cap will be given in priority to the self-employed losses. Sideways loss relief is where the losses are offset against general income of that year or are carried back against general income of previous years.

The restriction to loss relief applies where the individual carries on one or more trades either as a non-active partner, limited partner, or sole-trader in that tax year.

For both partnerships and sole-traders, an individual is regarded as non-active if he is not personally engaged in the trading activities for an average of at least 10 hours per week throughout the basis period. (The basis period is normally the accounting year.) If the basis period is shorter than 6 months, then the test period of hours worked is taken as either 6 months from the date the individual first commenced in the trade, or the period of 6 months ending with the date the individual permanently ceases the trade.

A limited partner is an individual who carries on a trade as a limited partner in a limited partnership registered under the Limited Partnership Act 1907. In practice an individual would act as a limited partner if he is not entitled to take part in the management of the trade, and the liabilities for any trade debts or obligations are paid by another person.

These non-active trader rules do not apply to losses derived from a Lloyd’s underwriting business.

Where a loss arises from arrangements, the main purpose or one of the main purposes of which is to obtain a reduction by means of sideways loss relief, then no sideways relief, or capital gains relief may be given for the loss.

This test is not designed to affect genuine loss-makers who have not entered into avoidance arrangements.

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