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Introduction to this document

Pre-incorporation losses claim

As your business grows you will probably be advised to consider transferring it to a company at some stage. But what happens to any brought forward losses if you decide to incorporate?

Incorporation

Despite changes to dividend tax, it is still possible to achieve efficiency through incorporation, but the maximum saving has been reduced due to changes in the way dividends are taxed. In fact, once your profits are around £150,000 it’s cheaper to pay tax as a sole trader due to the double taxation the profits distributed as dividends suffer.

Something that is often overlooked is what happens if you have brought forward losses. As you may be aware, trading losses can be relieved in several ways but, by default, they are carried forward to offset the first available profits from the same trade. Crucially, however, they cannot be transferred to a new company to offset company profits after incorporating.

Derived income

You can make a claim under s.86 Income Tax Act 2007 to enable you to carry forward the losses, and utilise them against future income derived from the company, such as salary, rent, interest or dividends. For s.86 to apply, the only consideration paid to the sole trader must be shares in the new company, and the company must carry on the same trade.

Use our Pre-incorporation Loss Claim form to do this. You need to make the claim within four years of the end of the tax year you want to relieve the income in.