When you permanently stop trading, section 89 of the Income Tax Act 2007 lets you set your terminal loss against profits of the same trade for the final tax year and the three tax years before it, latest year first. The terminal loss is the loss made from the start of the final tax year to the date you stop, plus any loss in the part of the previous tax year that falls within the 12 months before cessation. The claim must be made within four years after the end of the tax year concerned.

What problem does terminal loss relief solve?

A business that is winding down often makes its biggest losses at the end: stock is sold cheaply, staff are paid off and premises are cleared. Once the trade has ceased there are no future profits to carry those losses forward against, and the trader may have little other income in the final year. Terminal trade loss relief under sections 89 to 94 of the Income Tax Act 2007 (ITA 2007) solves this by sending the final 12 months’ losses back against profits the same trade earned in earlier years, producing a repayment of tax already paid.

It is available to individuals, partners and trustees (HMRC’s Business Income Manual at BIM85055) and applies to professions and vocations as well as trades (section 89(4)).

What counts as the terminal loss?

Section 90(1) defines two elements, which are added together:

  1. the loss, if any, made in the period from the start of the final tax year to the date of cessation; and
  2. the loss, if any, made in the part of the previous tax year that falls within the 12 months before cessation.

Each element is worked out from the profits or losses of the trade’s periods of account. Where no period of account matches a terminal loss period, section 90(3) allows the results to be apportioned and combined. If either element shows a profit, HMRC’s helpsheet HS227 and BIM85055 say it is treated as a nil loss, so a profit in one element does not reduce a loss in the other.

Before 2024 to 2025, section 90(5) required any overlap relief due in the final year to be included in the first element. Finance Act 2022 removed that subsection for 2024 to 2025 onwards as part of basis period reform, so for cessations now the calculation is based on the trading results alone.

How do you compute it?

Illustration only, apportioned in whole months for simplicity. Ana makes up accounts to 30 June. She stops trading on 31 December 2025, so her final tax year is 2025 to 2026.

  • Year to 30 June 2025: profit £8,000.
  • Six months to 31 December 2025: loss £26,000.
Element Period Working Result
Final tax year 6 April 2025 to 31 December 2025 3/12 of £8,000 profit, less £26,000 loss Loss £24,000
Previous tax year, within final 12 months 1 January 2025 to 5 April 2025 3/12 of £8,000 profit Profit £2,000, treated as nil
Terminal loss £24,000

Ana’s taxable profits of the trade in earlier years were £9,000 for 2024 to 2025, £12,000 for 2023 to 2024 and £10,000 for 2022 to 2023. Under section 91 the loss is set against the final year first (nil profit), then 2024 to 2025 (£9,000), then 2023 to 2024 (£12,000), then 2022 to 2023 (£3,000). The whole £24,000 is relieved and HMRC repays tax for those years.

Which profits can the loss be set against?

Section 89(3) is the key limit: the deduction is made only from profits of the trade that made the loss. It cannot be set against salary, pensions, rental income or another business. Section 91 sets the order: the final tax year, then the previous year, then the year before that, then the year before that. You cannot skip a year.

Two extensions help where trade profits run out. Section 92 treats interest and dividends that would have been trade receipts, but are taxed under other rules, as profits of the trade. Section 94 lets unrelieved interest that qualified for relief as a trade expense under section 383 be treated as a loss made at the date of payment. Any loss still unrelieved after the four years can be used in another relief in the same Chapter.

Because the relief is given only against profits of the same trade, it falls outside the cap on reliefs in section 24A ITA 2007; BIM85703 confirms the cap does not apply to trade losses relieved against profits of the same trade. A sideways claim under section 64, by contrast, is capped. See the cap on unlimited income tax reliefs.

How and when do you claim?

Section 89 sets no deadline of its own, so the general rule in section 43 of the Taxes Management Act 1970 applies: four years after the end of the tax year to which the claim relates. HMRC’s table at BIM85075 lists section 89 claims under that rule. For a trade that ceased in 2025 to 2026, HS227 gives the time limit for claims against profit of the same trade as 5 April 2030.

BIM85070 says the part of the claim relating to the year of cessation should be made in the return where possible, while carry back to earlier years can be a stand alone claim. HS227 asks you to state that the claim is for terminal loss relief, the amount of loss used for each year and the decrease in tax due for the earlier years.

HMRC’s National Insurance Manual at NIM24610 confirms that terminal loss relief is also given for Class 4 National Insurance in the same way as for income tax under section 89. See National Insurance for the self employed.

Should I use terminal loss relief or a sideways claim?

A loss in the final year can usually also be claimed under section 64 against total income of that year or the previous year; see using a trading loss against other income. The choice depends on where the income is:

  • Terminal relief reaches back further but only against the same trade’s profits.
  • Section 64 reaches only one year back but covers all income, and can extend to capital gains under section 261B of the Taxation of Chargeable Gains Act 1992, which may help where business assets are sold at a gain on closure.
  • BIM85055 confirms that any balance not relieved under section 89 can be claimed under section 64.

HMRC’s guidance at BIM85080 says that, strictly, same trade reliefs such as section 89 come before section 64 and section 72 claims. Where a section 64 claim has already become final, HMRC will in practice allow whichever claim the trader chooses to become final first. Each pound of loss is relieved once only.

When has a trade permanently ceased?

Relief depends on a permanent cessation in the tax year (section 89(1)). Some situations need care:

  • Partners. HS227 explains that a partner’s notional trade ceases on the date they leave the partnership, so a retiring partner can claim even though the firm carries on.
  • Change of residence. Section 17 of the Income Tax (Trading and Other Income) Act 2005 treats a trade as ceasing and restarting when an individual becomes or ceases to be UK resident, but section 17(3) still allows earlier losses to be carried forward against later profits.
  • Incorporation. When you transfer the business to your own company you stop carrying on the trade yourself. Terminal relief is one option; another is to keep losses for set off against income from the company under section 86. See carrying forward trading losses.

What mistakes come up?

  • Netting a profit in one element against a loss in the other instead of treating the profit as nil.
  • Trying to set the terminal loss against employment or rental income.
  • Working through the years earliest first instead of latest first.
  • Including overlap relief in a post 2024 cessation calculation.
  • Missing the four year deadline, which runs from the end of the tax year to which the claim relates.

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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.