BIM81310 - Transitional rules: spreading transition profits
Where there are transition profits for the 2023-24 tax year, the profits will be spread over five tax years. For each of the first four tax years, 20% of the amount of the profits will be treated as arising in each year starting with the 2023-24 tax year. The balance of profits will be treated as arising in the fifth tax year (2027-28). This increases the chargeable profits of those years.
However, where a trader permanently ceases to carry on their trade before the start of the fifth year, the balance of the profits is treated as arising in the tax year of cessation.
Example 19
A trader has transition profits of £30,000.
The amount of transition profits treated as arising in each tax year from 2023-24 to 2026-27 is £30,000 x 20% = £6,000.
The amount of transition profits treated as arising in the tax year 2027-28 is the remaining amount, £30,000 – (£6,000 x 4) = £6,000.
Example 20
A trader has transition profits of £20,000. They cease trading on 12 February 2026.
The amount of transition profits treated as arising in each tax year is set out below:
| Tax year | Taxable profits |
|---|---|
| 2023-24 | £20,000 x 20% = £4,000 |
| 2024-25 | £20,000 x 20% = £4,000 |
| 2025-26 | This is the year of cessation and therefore the balance of the transition profits is treated as arising in this year: Transition profits: £20,000. Less profits brought into charge (£4,000 x 2): £8,000. Balance of profits treated as arising: £12,000 |
Election to accelerate amount of transition profits charged to tax
Where there are transition profits for the 2023-24 tax year, the profits will by default be spread equally over five tax years (unless the trader ceases trading before the fifth tax year). But a trader may choose to make an election for an additional amount of the transition profits to be treated as arising in a tax year. The effect of an election will be that the profits of future years will be proportionately reduced.
An election must be made on or before the first anniversary of the normal Self Assessment filing date for the tax year to which it relates. The election must state the amount of the transition profits the trader wants treated as arising in the tax year.
If a valid election is made, the amount by which the transition profits are reduced for subsequent years will be calculated by the following formula: A x 5/T
A is the additional amount of the transition profits treated as arising in the tax year for which the election is made, and T is the number of spreading tax years remaining after the tax year of election.
Example 21
A trader has transition profits of £30,000. The amount of transition profits treated as arising in each of the tax years from 2023-24 onwards is £6,000 (£30,000 x 20%). The trader makes an election to treat an additional £3,000 of the transition profits as arising in the 2025-26 tax year.
The amount of transition profits treated as arising in each of the tax years is:
| Tax year | Taxable profits |
|---|---|
| 2023-24 | £30,000 x 20% = £6,000 |
| 2024-25 | £30,000 x 20% = £6,000 |
| 2025-26 | £30,000 x 20% = £6,000. Plus £3,000 (additional profits due to election) = £9,000 |
| Step 1 | To calculate the amount of transition profits to be used in the remaining years’ calculations, first calculate how much to reduce the transition profits by: Amount of additional profits x 5/(Number of tax years remaining): £3,000 x 5/2 = £7,500 |
| Step 2 | This amount is deducted from the total transition profits figure: £30,000 - £7,500 = £22,500. £22,500 is the amount of transition profits to be used in subsequent years’ calculations. |
| 2026-27 | £22,500 x 20% = £4,500 |
| 2027-28 | £4,500 remains to be taxed |
Example 22
A trader has transition profits of £20,000. The amount of transition profits treated as arising in each of the tax years from 2023-24 onwards is £4,000 (£20,000 x 20%). The trader makes an election to treat an additional £1,200 of the transition profits as arising in the 2024-25 tax year. In 2025-26 they make another election to treat an additional £1,000 as profits arising in the tax year.
The amount of transition profits treated as arising in each of the tax years is:
| Tax year | Taxable profits |
|---|---|
| 2023-24 | £20,000 x 20% = £4,000 |
| 2024-25 | £20,000 x 20% = £4,000. Plus £1,200 (additional profits due to election) = £5,200 |
| Step 1 | To calculate the amount of transition profits to be used in the remaining years’ calculations, first calculate how much to reduce the transition profits by: Amount of additional profits x 5/(Number tax years remaining). £1,200 x 5/3 = £2,000 |
| Step 2 | This amount is deducted from the total transition profits figure: £20,000 - £2,000 = £18,000. £18,000 is the amount of transition profits in subsequent years’ calculations. |
| 2025-26 | £18,000 x 20% = £3,600. Plus £1,000 (additional profits) = £4,600 |
| Step 1 | To calculate the amount of transition profits to be used in the remaining years’ calculations, first calculate how much to reduce the transition profits by: Amount of additional profits x 5/(Number tax years remaining). £1,000 x 5/2 = £2,500 |
| Step 2 | This amount is deducted from the revised transition profits figure: £18,000 - £2,500 = £15,500. £15,500 is the amount of transition profits in subsequent years’ calculations. |
| 2026-27 | £15,500 x 20% = £3,100 |
| 2027-28 | £3,100 remains to be taxed. |