101Smart Ltd

Losses and averaging

Farming profits often fluctuate greatly year on year. The use of loss relief and Farmers’ Averaging provides a tax consolation to years of small profits or losses.
Tax Investigation

Loss relief

There are three main ways in which a taxable trading loss (not necessarily an accounts loss) can potentially be useful in terms of tax liabilities:

  • Set against other income of the current and/or previous tax year; providing immediate tax relief.
  • Set against capital gains of the current and/or previous year.
  • Carried forward to set against future profits of the same trade.

There are some restrictions that apply to offsetting losses against income or capital gains.  Loss relief cannot be claimed in the following circumstances:

  • Where the trade is not run commercially for profit
  • For farmers that have made a taxable loss in in each of the previous 5 tax years

Tax reliefs that you can claim each tax year against other income are restricted to the higher of £50,000 or 25% of total income.

Capital losses can be offset against capital gains arising in the same tax year, however they cannot be carried back and offset against gains of earlier years.  Any unused capital losses are carried forwards to be offset against future gains.  Many of our dairy clients have capital losses carried forward in respect of milk quota.

Farmers’ Averaging

Farmers’ averaging is available to sole traders and partners in a partnership.  It is a unique relief for farmers and provides the option to average taxable profits over 2 or 5 years where the following conditions are met:

2 year averaging

5 year averaging

The difference between the taxable profits for the 2 years must be greater than 25% of the year with the highest profit

The difference between the taxable profits for the 4 previous years must be greater than 25% of the year with the highest profit






The objective of using this relief is to move taxable profit to years of a lower rate tax band that wasn’t originally used in the year.

Each year, the use of losses should be compared to the benefit of averaging to identify the most tax efficient options for each person.  The answers may well be different for each partner in a partnership and should always be considered as part of the annual tax return process for farmers.

Kathy Harris

May 2020

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