Farming losses: the five year rule

Section 67 of the Income Tax Act 2007 stops a farmer or market gardener setting a loss against other income if the trade made a loss, calculated before capital allowances, in each of the previous five tax years. The loss is not wasted, because it can still be carried forward against later profits of the same trade, but it can no longer reduce tax on salary, pensions or investment income unless one of three exceptions applies.

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Why is there a special rule for farming losses?

Section 9 of the Income Tax (Trading and Other Income) Act 2005 treats all farming and market gardening in the United Kingdom as a trade whether or not it is run commercially with a view to profit. That means a loss making farm can, in principle, qualify for trade loss relief against general income under section 64 of the Income Tax Act 2007 (ITA). HMRC’s Business Income Manual at BIM85601 explains that some people with income from other sources take up farming for recreation, lifestyle or status, so Parliament added two restrictions: the general commerciality test in section 66 ITA, and the mechanical five year rule in section 67, often called the hobby farming rule.

For these purposes, section 996 ITA defines farming as occupying farmland wholly or mainly for husbandry, which includes hop growing and the breeding and rearing of horses with grazing in connection with that; market gardening means occupying a garden or nursery to grow produce for sale. BIM85620 notes that although only UK farming is deemed to be a trade, the five year rule itself is not limited to UK activities.

How does the five year rule work?

Section 67(2) denies trade loss relief against general income for a loss of the current tax year if a loss, calculated without regard to capital allowances, was made in the trade in each of the previous five tax years. Three points decide most cases:

Capital allowances are ignored. Section 70(6) says the test looks at the result before capital allowances and balancing charges. A farm that makes a small profit before allowances but a loss after them has broken the run.
The test is by tax year. BIM85630 confirms each tax year to 5 April is looked at. Where accounts end on another date, results are apportioned to tax years under section 70(4) and (5), so a single profitable accounting year may not produce a profitable tax year.
The year of commencement does not count. Section 67(3)(c) gives relief if the trade started within the five tax years before the current year. BIM85625 explains that for a new business making losses every year, the loss of the seventh tax year is the first to be caught.

Once the rule applies it keeps applying until a tax year shows a profit before capital allowances. A new run of five loss years is then needed before it can bite again.

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What relief is still available when the rule applies?

BIM85605 sets out the effect:

trade loss relief against general income under section 64 is denied;
relief for the loss against capital gains is also denied;
carry forward against future profits of the same trade is not restricted. See carrying forward trade losses.

For how sideways relief works when it is available, including the claim deadline and the cap on relief, see trading losses against other income.

What are the exceptions?

Part of a larger trading undertaking

Section 67(3)(a) protects a loss where the farming forms part of, and is ancillary to, a larger trading undertaking. BIM85645 gives the examples of a butcher fattening bullocks for the shop, a manufacturer growing its own raw materials, and a seed or chemical business running a test farm. HMRC reads “ancillary” strictly, and says a diversified farm will only succeed if the new activity has become the major part of the business and the farming now serves it, such as a farm converted into a visitor attraction.

Reasonable expectation of profit

Section 68 sets a two part test judged against a hypothetical competent farmer or market gardener:

a competent person carrying on the activities of the current year, in the way they were actually carried on, would reasonably expect future profits; and
a competent person carrying on those activities from the start of the prior period of loss could not reasonably have expected them to become profitable until after the end of the current year.

The prior period of loss is the five previous tax years, or longer if losses before capital allowances stretch back further. BIM85640 says a hope of profit is not enough: the farmer needs hard evidence, of the kind that would satisfy a bank, and evidence of the normal loss making period for that type of long term venture. HMRC will look at consultants’ reports, and if those say the farm could have been profitable with changes the farmer did not make, the second limb fails.

A trade started in the last five years

Section 69 treats a trade as ceasing and a new one starting only where every person carrying it on before a change stops carrying it on. Spouses and civil partners count as the same person, and so does a company either or both of them control. BIM85635 adds that a new partner joining a firm is not a fresh start, but a trade passing to a widow, widower or surviving civil partner on death starts a new run.

Does the same rule apply to companies?

Yes. Section 48 of the Corporation Tax Act 2010 denies relief under section 37 (set against total profits and carry back) for a farming or market gardening loss where a loss before capital allowances was made in the current accounting period and in each accounting period falling wholly or partly within the five years before it began. The same three exceptions apply. Moving a loss making farm into a company controlled by the farmer or spouse does not restart the clock. For the general rules, see company trading losses.

Worked example

Illustration only. Ruth starts a small beef enterprise in 2019 to 2020 and keeps a salaried job. The farm makes a loss before capital allowances every tax year. She sets the losses of 2019 to 2020 through 2024 to 2025 against her salary. For 2025 to 2026 the previous five tax years, 2020 to 2021 through 2024 to 2025, all show losses and the trade did not start within those years, so her 2025 to 2026 loss of £8,000 cannot be set against her salary. It is carried forward against future farm profits. In 2026 to 2027 she cuts costs and makes a profit of £1,500 before capital allowances, even though capital allowances turn it into a small loss. Any loss after allowances for 2026 to 2027 is itself still caught, because the five years before it were all loss years. But the run is now broken, so a loss in 2027 to 2028 can again be set against her salary, provided the commerciality test in section 66 is met.

What mistakes and risks should advisers look for?

Testing by accounting year rather than by tax year when the year end is not 5 April.
Counting results after capital allowances, which can wrongly suggest the run continues or has been broken.
Assuming a profitable year will satisfy HMRC. BIM85650 warns officers to check for manufactured profits, such as expenses charged to capital account, sales or costs put in the wrong year, or manipulated stock values. A herd basis election also changes how livestock sales are taxed; see the herd basis election.
Assuming a farm that passes the five year test is safe. Section 66 still requires the trade to be run on a commercial basis with a view to profit, and BIM85601 tells officers to consider challenging clearly uncommercial activities on that basis where the five year rule does not apply. BIM85615 adds that small farmers genuinely trying to make a living on marginal farms are not the target.
Bringing in a new partner and expecting a fresh start. It is not one.
Relying on the long term venture exception without contemporaneous evidence of a realistic route to profit.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.