5 forgotten loss relief individual can claim in tax return

What do you mean by a loss in parlance to the Income tax regulations?

In the context of income tax, a loss is the amount by which an individual’s total allowable expenses exceed their taxable income in a given tax year. This means that the individual did not earn enough income to cover all of their expenses, resulting in a loss that can be used to reduce their taxable income.

There is a bright side to the instances when you have to face a loss as per tax regulations. Taxpayers can at times forget to adequately showcase the loss sustained from any particular source of income to claim tax relief. The HMRC has in effect various loss relief avenues available to get overall tax saving advantage in the long run. Loss relief claims can be an important tool for individuals in the UK to reduce their tax liability. We shall delve into the top 5 relevant yet often forgotten loss relief claim 

What are the top 5 useful yet forgotten loss relief claims that individuals can make in their tax return?

Depending on the source of your earnings, you can set off and carry forward different losses and use them as tax relief opportunities. Here we have listed some of the top loss relief claims that individuals may be able to make optimise their tax obligations. We have also illustrated some examples to help individuals understand how they can claim them in their tax return. 

1. Unused residential finance cost: 

This form of loss relief applies to individuals who have taken out a mortgage or loan to purchase a rental property, and who have incurred finance costs such as interest payments. Under current rules, landlords are only able to claim a basic rate (currently 20%) reduction on finance costs (including brought forward finance cost) from total tax payable. But this is not as straightforward a calculation as you think. 

The calculated finance cost for basic tax rate relief is further restricted and is reduced to lower of:

• Net rental profit – this is an amount after brought forward losses of past years or
• Adjusted total taxable income – total taxable income after losses and reliefs, and excluding savings and dividends income.

The reason behind further restriction is simple logic that anyone from a tax reduction plan can’t be used to claim a tax refund in case you have lower income. Hence, any unused finance costs can be carried forward and used in future years. 

For instance; Tom owns a rental property that he purchased with a mortgage. 

In the tax year 2021-2022, 

• In addition to his gross salary income of £40,000,
• Tom’s rental income from BTL property was £10,000 
• He incurred £7000 as repair, maintenance and management cost and
• £5,000 as in mortgage interest payments. 

Under current rules, Tom can only claim a basic rate reduction on his finance costs, which would reduce his total tax bill by £1,000. 

But section 24 tax law further restricts the basic rate relief maximum for taxable profit from rental property (before finance cost) of the year i.e; £3,000 (10k t minus £3k). In this case, your available relief is reduced to £600 only calculated as 20% of £3000.  This leaves £2,000 of unused finance costs that Tom can carry forward to future tax years. 

In the tax year 2022-2023, 

• Tom’s rental income is £12,000 and £2,000 of repairs expenses.  
• Assuming he has the same gross salary income, 
• He again incurs £5,000 in mortgage interest payments. 

This time, Tom can claim a basic rate reduction on his finance costs (including carry forward unused finance cost) of £1,400 ( calculated as £5,000 + £2000 X 20%).  

This reduces Tom’s tax bill by a further £400 (considering a basic tax rate of 20%). Without the unused residential finance cost loss relief claim, Tom would have been liable for £1,000 in income tax on his rental income in the tax year 2022-2023. However, by using the unused finance cost brought forward relief claim, Tom’s tax liability is reduced to £600, saving him £400 in tax.

2. Carry-forward loss in self-employment business:

If an individual incurs losses in their self-employment business, they may be able to carry these losses forward to offset against future profits. This can be especially helpful for those who are just starting out in their business and may be incurring significant expenses. Let’s take a hypothetical case of Ms. Samantha, who is a self-employed graphic designer. In the tax year 2021-2022, Samantha’s business expenses exceeded her income, resulting in a loss of £3,000.  

In the tax year 2022-2023, Samantha’s business income is £25,000, and her expenses are £15,000. This results in a profit of £10,000. However, Samantha can use her carried forward loss from the previous tax year to reduce her taxable income. She deducts the £3,000 loss from her profit, leaving her with a taxable income of £7,000.

3. Loss from rental income of Buy-to-Let (BTL) Property:

Individuals who own a buy-to-let property may be able to claim loss relief on any losses incurred from the rental income of the property. This could include expenses such as repairs, maintenance, and management fees.

Here’s an example of how an individual might use the loss relief claim for losses from rental income of a Buy-to-Let (BTL) Property. James owns a Buy-to-Let property that he rents out to tenants. In the tax year 2021-2022, James received rental income of £12,000, but he incurred expenses of £14,000, including mortgage interest, repairs, and management fees. This resulted in a loss of £2,000. In the tax year 2022-2023, James has rental income of £14,000, and expenses of £13,000. This results in a profit of £1,000. However, James can use his carried forward loss from the previous tax year to offset against this profit. He deducts the £2,000 loss from his profit, leaving him with a taxable income of £0.

4. Share loss relief set off against income in special cases: 

Individuals who have incurred losses from the sale of shares may be able to claim share loss relief. This relief can be set off against personal income in certain circumstances, such as when the shares were in a qualifying trading company under Enterprise Investment Scheme and all conditions for eligibility are fulfilled. One must note that the rules for setting off share losses against personal income are complex, and depend on the specific circumstances of each individual case. Additionally, there are limitations on the amount of loss that can be claimed in any given tax year.

Let us take a supposed scenario to understand how you can claim this share loss relief. Mark invested in shares in a startup company, hoping to make a profit. However, the company went bankrupt, and Mark lost his entire investment of £20,000. Under the share loss relief set off against income in special cases, Mark  can claim relief for the loss he suffered by setting it off against his income. However, the relief is subject to certain conditions and limitations. Mark can use this loss to offset against his income in the tax year that the loss was incurred, or he can carry it forward to offset against future gains. In the tax year 2021-2022, Mark has a taxable income of £30,000 (in addition to personal tax free allowances). He can use his share loss relief to reduce his taxable income. Assuming Mark is a basic-rate taxpayer with a tax rate of 20%, his tax bill would be £6,000 without the loss relief claim. However, by using his share loss relief, Mark can deduct the £20,000 loss from his taxable income, reducing it to £10,000 and tax payable would be only £2000. A saving of £4000..

5. Setting off capital loss with your capital gain and carry-forward unused losses : 

Individuals who have incurred losses from the sale of a capital asset, such as a property or shares, may be able to set these losses off against any capital gains they have made in the same tax year. This can also be carried forward to future years if unutilized. This can help to reduce their overall tax liability. 

Alice sold some capital assets during the tax year 2021-2022 and made a capital gain of £20,000. However, Alice also sold some other stocks at a loss during the same year and incurred a capital loss of £5,000. Alice can use her capital loss to offset against her capital gain, reducing the amount of capital gains tax she has to pay. In this case, Alice can deduct the capital loss of £5,000 from her capital gain of  £20,000, resulting in a net capital gain of £15,000. If Alice is liable for a capital gains on shares tax rate of 10% , her tax bill without the loss relief claim would be £1,500 (assuming no free capital gain allowances for easy calculation). Thus, by using the loss relief claim, she saves £500 in capital gains tax.

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Individuals can streamline their tax compliance process and ensure that they are claiming their tax relief adequately with CoreAdviz Accountants. We offer a range of tax services, including tax planning, compliance, and advisory services, that can help individuals make informed decisions about their tax affairs. With the help of CoreAdviz Accountants, individuals can identify and take advantage of the various tax relief options that are available to them. Book a consultation now!