Terminal Loss Relief is available when a business permanently stops trading and makes a loss in its final 12 months.
You can carry back trading losses from the last year of trading and offset them against profits from the previous 3 years. This can reduce your Corporation Tax liability or even create a repayment.
How Terminal Loss Relief Works
Terminal Loss Relief allows you to carry losses backwards instead of forwards.
In practice:
- Losses must arise in the final 12 months of trading
- You must use losses against the most recent profits first
- You can then carry any remaining loss back up to 3 years
For example: If your company closes in 2025 and makes a loss, you first offset that loss against profits from 2024. You then more back to 2023 and then 2022.
As a result, you may receive a refund for Corporation Tax already paid in those earlier years. This can help businesses recover tax paid during profitable periods.
What Counts as a Terminal Loss
A terminal loss includes:
- Losses made in accounting periods fully within the final 12 months
- A proportion of losses from periods that partly fall within that time
If an accounting period overlaps the final 12 months, you must apportion the loss. This ensures that only the relevant portion qualifies.
Qualifying for Terminal Loss Relief
To claim Terminal Loss Relief, you must meet specific conditions:
- The business must have permanently ceased trading
- The loss must be a trading loss
- The loss must arise in the final 12 months of trade
- You must offset losses against profits from the same trade
However, this relief does not apply to all losses. Capital losses and property income do not qualify. Additionally, a temporary pause in trading does not qualify, as the business must stop permanently.
While relief appears straightforward, several rules apply.
1. Same Trade Requirement
You can only offset losses against profits from the same trade. If your business activities changed, this may limit your claim.
2. Order of Use
You must follow a specific order when using losses:
- Start with the most recent accounting period
- Then move back year by year
You cannot skip years or change this order.
3. Apportionment of Profits
If accounting periods do not align with the 3-year window, you must split profits. This often applies where accounting dates have changed.
4. Anti-Avoidance Rules
You cannot transfer a trade simply to claim relief. HMRC will reject claims where tax avoidance forms the main purpose.
Extended Relief for Carried Forward Losses
Since 1 April 2017, additional rules apply to carried forward trading losses.
If your company stops trading, you may also:
- Use carried forward losses in the final accounting period
- Offset them against profits from up to 3 years before cessation
However, the rules differ slightly from standard terminal loss rules:
- The 3-year period runs up to the end of the final accounting period
- You must still use losses against the most recent profits first
- You cannot use losses against periods before the loss originally arose
Additionally, this relief is not subject to the usual carried forward loss restrictions.
How to Claim Terminal Loss Relief
You can claim Terminal Loss Relief in several ways:
- Include the claim in your Corporation Tax return
- Amend a previously submitted return
- Submit a separate written claim to HMRC
Your claim should include:
- Company name
- Accounting period of the loss
- Amount of the loss
- How you plan to use the loss
You should also keep clear records to support your calculations. This helps prevent delays or queries from HMRC. Moreover, you must act within the deadlines.
| Final 12-month losses | Within 2 years of the accounting period end |
| Carried forward losses | Within 2 years of the cessation period end |
If you miss these deadlines, you may lose the relief completely.
Other Types of Losses
Capital Losses
- Arise from selling or disposing of assets
- Cannot be offset against trading profits
- Are treated separately for tax purposes
Property Income Losses
- Must be used in the same accounting period where possible
- Cannot be carried back
- Can be carried forward if unused
In some cases, group companies can share property losses. As a result, these losses follow different rules and do not qualify for Terminal Loss Relief.
Other Types of Relief
Terminal Loss Relief is not the only option available,
Other reliefs include:
- Carry Forward Relief for ongoing businesses
- Group Relief within company groups
However, once a company stops trading, Terminal Loss Relief often becomes the main option.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.