Can I use sole trader losses after incorporating

Yes, if you transferred your business to the company wholly or mainly in exchange for shares. Section 86 of the Income Tax Act 2007 lets unused trading losses from your sole trade be carried forward against income you receive from the company, including salary, dividends, interest and rent. The relief lasts only while you keep the shares and the company carries on the trade, and it is set against the first income available each year, so how you draw money from the company decides how much tax the losses actually save.

How does section 86 let losses follow the business?

Trading losses carried forward under section 83 of the Income Tax Act 2007 can normally only be set against later profits of the same trade. Once a company runs the trade, you no longer have any profits from it, so without help the losses would be stranded. Section 86 fixes this. Where the conditions are met, section 86(2) treats the income you derive from the company as profits of the trade for carry forward loss relief. For a former partnership, the income is treated as profits of your notional trade. Section 86(5) says the income may be dividends on the shares or otherwise, and HMRC’s Business Income Manual at BIM85060 lists dividends, interest, remuneration and rent received from the company.

The relief belongs to you, not the company. The company starts with no losses from your sole trade and pays corporation tax on its own profits in the normal way. The general carry forward rules are covered in carrying forward trading losses as an individual; this page looks at how the relief works in practice once the company is paying you.

What conditions must be met?

Section 86(1) requires that:

• the trade was carried on by you as a sole trader, or by individuals in partnership;
• the trade is transferred to a company;
• the consideration for the transfer is wholly or mainly the allotment of shares to you, or to all of the partners; and
• your total income for a relevant tax year includes income derived from the company.

Section 86(6) extends the rule to businesses that are not trades, and section 83(5) applies carry forward relief to professions and vocations, so a professional practice incorporating is covered. BIM85060 adds that where the sale agreement expresses the price as cash but the whole amount is subscribed for shares, the shares may be regarded as the consideration. A transfer mostly credited to a director’s loan account, rather than satisfied by shares, risks failing the wholly or mainly test.

Which tax years count?

A tax year is relevant only if two tests are met. For the tax year of the transfer, section 86(3) requires that you are the beneficial owner of the shares allotted and the company carries on the trade throughout the period from the date of transfer to the next 5 April. For every later year, section 86(4) requires both tests to be met throughout the whole tax year. HMRC’s helpsheet HS227 says the same in plain terms.

BIM85060 gives a practical concession: relief should not be refused so long as you keep shares representing more than 80% of the consideration you received for the business. Selling or giving away more than that, or the company stopping or changing the trade, can end the relief for that year and every year after it. Any losses left at that point are lost.

How is the relief set against salary and dividends?

Carry forward relief is not optional once income exists. Section 84 says the unrelieved loss is deducted from the profits of the next tax year, then the following year, and so on until it is used. HS227 says the relief for each year is the lower of the losses carried forward and your income from the company. You cannot leave the losses unused in a year when you have income from the company and save them for a later, higher income year.

The loss is deducted at Step 2 of the income tax calculation in section 23, before the personal allowance at Step 3. That order has a real cost. If your income from the company is no higher than your personal allowance, the loss is used up against income that would have been tax free anyway.

The order within your income also changes. For 2026 to 2027, section 25(2) requires reliefs to be deducted in the way that produces the greatest reduction in your income tax. For 2027 to 2028 onwards, section 25(3A), inserted by the Finance Act 2026, requires reliefs to be deducted from income other than property, savings and dividend income before those types, so far as possible. In practice, from 2027 to 2028 the losses will normally be set against salary before dividends.

How might salary and dividends be planned around the losses?

Illustration only, using the 2026 to 2027 personal allowance of £12,570 and ignoring National Insurance. Priya incorporates her sole trade on 1 July 2026 in exchange for shares, with £30,000 of unused trading losses.

Approach in 2026 to 2027	Income from company	Loss used	Taxable after allowance	Loss left
A: modest drawings	£12,000	£12,000	£0	£18,000
B: higher drawings	£42,570	£30,000	£0	£0

In approach A, Priya would have paid no income tax on £12,000 anyway, yet £12,000 of losses is used. In approach B, the losses shelter £30,000 of income that would otherwise have been taxed, and the personal allowance covers the rest. The total tax saved by the losses is much higher in B, even though the loss is used in both cases. Whether higher drawings suit the company depends on its profits, corporation tax and cash needs, which are discussed in salary vs dividends from a limited company.

How is the relief claimed?

The relief is given through your Self Assessment return as part of carry forward loss relief. HS227 explains that losses carried forward can be used against income from a company you transferred your trade to wholly or mainly for shares, which it calls pre incorporation loss relief, and that any losses remaining are carried forward against future income from the company while the conditions continue to be met. HS227 also notes that a claim to carry losses forward may be made up to four years after the end of the tax year of the loss, where it is not made in the return. Keep the incorporation documents, the share allotment and a running record of the losses used each year, because HMRC may ask for them.

What about losses in the final months before incorporation?

Incorporation ends the sole trade, so the losses of the last period of trading may qualify for terminal loss relief, which sets losses of the final 12 months against profits of the same trade for the final tax year and the three years before it. That can give a repayment, whereas section 86 relief depends on future income from the company. The two reliefs work differently and the choice should be made before the return is filed; see terminal loss relief. The capital gains side of transferring the business for shares is covered in incorporation relief.

What mistakes come up most often?

• Taking the business into the company for a loan account credit. The consideration must be wholly or mainly shares.
• Drawing very little in the early years. The losses are used against the first income available, even income covered by the personal allowance.
• Transferring shares to a spouse or investor. Keeping less than 80% of the shares received can end the relief under HMRC’s practice.
• Assuming the company can use the losses. The relief is personal to the former sole trader or partners.
• Not tracking the balance. Without a yearly record, losses are often claimed twice or forgotten.

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Related Accountapedia entries

• Gift holdover or incorporation relief on incorporating
• Recording goodwill when a sole trader incorporates
• Your first tax year as a sole trader
• What expenses can a sole trader claim
• What happens to rental losses when you incorporate

Related cover: What public liability insurance covers and Professional indemnity vs public liability.

Sources

• legislation.gov.uk: Act 2007 c. 3, section 86
• legislation.gov.uk: Act 2007 c. 3, section 83
• legislation.gov.uk: Act 2007 c. 3, section 84
• legislation.gov.uk: Act 2007 c. 3, section 23
• legislation.gov.uk: Act 2007 c. 3, section 25
• GOV.UK: Manual page BIM85060
• GOV.UK: Hs227 losses 2026
• GOV.UK: Income tax rates

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.