USE OF LOSSES FOR INCOME TAX AND CAPITAL GAINS TAX

IN a business start-up, one is better to trade as a sole trader rather than as a company. Any losses made initially can be offset against other income of the trader or their spouse in the same tax year.

If trading as a company, the losses can only be carried forward against future profits.

However, there may be other issues to consider when looking at using a company (e.g. high risk of failure and ownership of valuable assets which would be at risk of creditors if trading as a sole trader).

If losses in a business continue for several years, it may face a Revenue Audit as Revenue will wonder why the business continues (e.g. in a cash business, if all the sales income is not lodged then this may create losses that are not genuine).

In farming, if you have losses for three years in succession then the year four losses will not be off-settable against other income of yourself and your spouse. However, if you make a small profit in year four then you have a new threeyear cycle of allowable losses.

The three-year loss rule does not affect claims for capital expenditure on farm buildings and machinery which can be offset against other income of the same year.

For a loss to be allowable for tax purposes, you must be carrying on a taxable activity (e.g. a loss as a forest owner is not allowable against other income because if there were a profit it would be exempt from tax). However, the forest loss can be carried forward against future profits.

Capital Gains Tax losses are widespread, be it from Eircom shares or AIB and BoI shares. They are losses in capital and do not feature for Income Tax. They can be carried forward against future gains.

In the crash, many people took advantage of the collapse in property prices to transfer assets to their children and crystalised losses. Such losses are connected losses and cannot be used to shelter other gains.

A loss created on a transfer of assets to a relative can only be offset against a gain made on a transfer of another asset to the same person.

However, a gain made now on a transfer of assets to children can be covered by general Capital Gains Tax losses forward as a result of the disposal of shares in Eircom or the Irish banks.