02 October 2026
If you transfer your sole trade or partnership to a limited company, any unused trading losses do not automatically transfer to the company.
Those losses remain personal to the sole trader or individual partners. Normally, carried-forward trading losses can only be used against future profits of the same trade. Once the individual stops carrying on the trade, the losses may therefore become unusable, although other loss reliefs may be available depending on the circumstances. HMRC confirms that ordinary carried-forward trading losses are generally available only against profits arising from the same trade.
Is There a Relief Available?
Yes. Section 86 of the Income Tax Act 2007 may allow unused trading losses to be carried forward and used against certain income the individual receives from the company after incorporation.
The relief may apply where:
- A trade carried on by an individual or individuals in partnership is transferred to a company.
- The consideration for the transfer is wholly or mainly the allotment of shares to the individual or partners.
- The company continues to carry on the transferred trade.
- The individual continues to beneficially own the shares allotted on incorporation.
- The individual receives income from the company in the relevant tax year.
Where the conditions are met, qualifying company income is treated as profits of the former trade for the purpose of using the individual’s carried-forward losses.
What Company Income Can the Losses Be Used Against?
According to HMRC, qualifying income can include:
- Salary or director’s remuneration
- Dividends
- Interest
- Rent received from the company
The losses remain the individual’s losses. They are not transferred to the company and cannot be set against the company’s taxable profits.
Do I Need to Retain All My Shares?
The legislation requires the individual to remain the beneficial owner of the shares allotted in connection with the transfer throughout the relevant period. The company must also continue carrying on the transferred trade throughout that period.
However, HMRC states that, in practice, relief should not be refused where the individual retains shares representing more than 80% of the consideration received for the business. This is an administrative practice rather than the precise statutory test, so any later share transfer should be reviewed carefully.
Does the Form of Consideration Matter?
Yes. The consideration for transferring the business must be wholly or mainly the allotment of shares.
HMRC also states that where the transfer agreement expresses the consideration as cash, but the whole amount is subscribed for shares in the company, the shares may be regarded as the consideration for this relief. This should not be assumed to apply automatically to every cash-and-share arrangement.
Is There a Deadline for Claiming?
A claim under Section 86 must normally be made within four years from the end of the tax year to which the claim relates. HMRC notes that the statutory time limit can be extended in certain circumstances.
The way the business transfers, share consideration and future ownership are structured can determine whether the losses remain usable.
If you have unused trading losses, you should review the position before transferring your sole trade or partnership to a company.
Need Advice Before You Incorporate?
At Morrissey Chartered Accountants, we can assess the available losses, consider the conditions for incorporation loss relief and help structure the transfer tax efficiently.
Contact Michael on 028 4461 7130 before completing your incorporation.
