A farming client of ours passed away in September 2022 and in his Will he specifically left his farming trade to a non lineal decedent. Probate was granted in July 2023 where assets were formally appointed out under the terms of the Will.
The farming accounts from DOD have shown a trade loss which has been reported via an estate Tax Return however I have two queries:
As the trade was left as a specific legacy is there argument that the beneficiary inherited the trade at DOD and therefore any profit or loss (as is the case here) should actually be reported on his personal Tax Return and not the estate?
If this is not the case and it is correct to report the trade loss via the estate Return can any remaining loss be transferred to the beneficiary at the end of administration?
Many thanks in advance for your thoughts/comments.
Losses in a trade can be carried forward against future profits of “the trade”:ss 83,84 ITA 2007. The use of the definite article means the same trade and case law establishes what that means in detail. A change of ownership of a trade, whether by sale or gratuitous transfer, breaks the continuity and losses cannot be carried forward beyond the break.
There have long been deemed continuity rules for qualifying transfer of a trade to a company (s86) and for changes of partners in a partnership carrying on a notional trade. The latter was in ss852 and 853 ITTOIA 2005 but for 2024-5 these are repealed and replaced by the new basis period walking catastrophe: FA 2022 Sch 1.
That means there is no special provision for a sole trader who transfers his trade to another such. The trade is regarded as having ceased. Terminal loss relief will be available. But losses cannot go forward whoever succeeds to the trade.
HMRC set out their view in BIM80570. They accept that PRs may (exceptionally) carry on the business during the admin period in which case losses can be used against the profits of that period but “If, on the death of a husband, wife or civil partner, a business passes from the deceased to the surviving spouse, the cessation and commencement provisions will apply”. They might have said anyone else either and it is curious that they do not mention a child but there is no special treatment for one either. It seems capricious that if any of these persons, and indeed a third party, were in partnership with the deceased the losses would go forward.
Naturally the rules are reversed as regards the hobby farming anti-avoidance to prevent the artificial early termination and renewal of the 5 year “uncommercial” test period: ss 67-70 ITA 2007