Using Losses Effectively: Income, Property and Capital Gains in 2025/26

Losses are an inevitable part of running a business or managing investments — but when used correctly, they can be a powerful tool to reduce your tax bill. Whether you’re a sole trader, landlord, investor, or company director, understanding how to use losses across income tax and capital gains tax is essential for effective planning.

This article sets out the rules for trading losses, property losses, and capital losses in the 2025/26 tax year, with practical guidance on how to claim, carry forward, or offset them.

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1. Trading Losses (Sole Traders and Partnerships)

If you’re self-employed or in a partnership, and your business makes a trading loss in 2025/26, there are several options available under the Income Tax Act 2007.

Option A: Set Off Against Other Income (Same Year)

You can set the trading loss against your other income in the same tax year. This includes:

• Employment income
• Rental income
• Pension income
• Bank interest and dividends

This can be especially valuable if you’re a higher-rate taxpayer, as it reduces your overall tax liability for the year.

Claim deadline: 31 January 2028 (for 2025/26 losses)

Option B: Carry Back to Prior Year

Alternatively, you can carry the loss back one year to offset it against income in 2024/25. This may generate a repayment of tax already paid.

To do this:

• You must have carried on the same trade in the prior year
• Losses must be offset against total income for that year

This option is useful if your current year income is low but you paid tax in the previous year.

Option C: Extended Carry Back (Early Years Only)

If you’re in your first four years of trading, you may carry the loss back up to three years, using the loss against income from the earliest year first.

This is especially helpful for new businesses with startup losses and a taxable income history.

Option D: Carry Forward Against Future Profits

If you don’t want to offset the loss now — or you don’t have other income to set it against — you can carry it forward to offset against future profits from the same trade.

This is done automatically unless you make a claim to use it another way.

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Restrictions and Considerations

• If you use losses to reduce income below £125,140, it may restore your Personal Allowance, saving you more tax.
• Loss relief may be restricted under sideways loss relief caps, especially if the trade is not commercial or is a hobby.
• Loss relief is capped at the higher of £50,000 or 25% of your total income when offsetting against other sources.

Make sure records are well maintained and your claim is supported by proper trading accounts and documentation.

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2. Property Income Losses

If your rental property makes a loss — for example, where allowable expenses such as mortgage interest, repairs, and letting agent fees exceed rental income — the treatment is more limited.

General Rule

• Property losses can only be carried forward
• They must be used against future rental profits
• You cannot set them against employment or other income

This includes losses from:

• UK property businesses
• Furnished holiday lettings (for 2025/26 — final year before the regime ends)
• Foreign rental income

You don’t need to make a formal claim — losses are carried forward automatically and must be used as soon as possible.

Example:

In 2025/26, you make a loss of £4,000 on your rental property. In 2026/27, you make a profit of £6,000. You must deduct the £4,000 loss, and only pay tax on the remaining £2,000.

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3. Capital Losses

If you sell an asset — such as shares, crypto, or a second property — at a loss, you may be able to use that loss to reduce your Capital Gains Tax (CGT) bill.

Same Year Offset

If you made a capital gain and a loss in the same tax year, the loss is deducted from the gain before CGT is calculated.

Carried Forward

If you make a capital loss in 2025/26 but have no gains to use it against, you can carry it forward indefinitely.

However:

• You must claim the loss on your Self Assessment tax return (or write to HMRC) within four years
• Losses must be used against the first available gains in future years

Restrictions on Certain Losses

• Losses from connected party transactions (e.g. selling shares to a spouse) are usually restricted
• Losses on negligible value claims (e.g. failed investments) can be crystallised for relief — but require a formal claim

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Matching Gains and Losses: Strategic Planning

If you expect a capital gain, it can be worth:

• Reviewing your portfolio for loss-making assets
• Triggering a disposal to generate a loss
• Timing disposals to use your £3,000 annual exemption (2025/26 amount)

Married couples can use ownership transfers before sale to:

• Use both partners’ annual CGT exemptions
• Spread gains across tax bands
• Combine gains and losses efficiently

Losses carried forward must be used before using the annual exemption in a later year.

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4. Company Losses (Corporation Tax)

Companies can also claim relief for trading losses, subject to different rules.

Carry Back

• A trading loss can be carried back one year against total profits
• This may generate a tax refund at the main rate of corporation tax (now 25%)

Group Relief

If the company is part of a group, the loss may be surrendered to another company in the same group — reducing their tax bill.

Carry Forward

Any remaining losses can be carried forward to offset future profits.

From April 2023, companies can only offset up to 50% of profits above £5 million, but for smaller businesses, this usually isn’t a restriction.

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5. How to Claim Loss Relief

Each type of loss has different rules for when and how to claim:

Always retain supporting records — HMRC may request evidence if a loss is large or unusual.

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Summary

Losses are more than just setbacks — they’re tax assets. When managed carefully, they can reduce income tax, capital gains tax, or corporation tax, and in some cases generate repayments from HMRC.

Key takeaways for 2025/26:

• Use trading losses strategically: set off, carry back, or carry forward
• Know that property losses are limited to future rental profits
• Declare and track capital losses for future CGT use
• Companies should act early to carry back or group-relieve losses

Review your income streams, filing deadlines, and record keeping