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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Partnerships: Limited partnership: restriction of relief for limited partners

S103A, S103C, S104, S105 Income Tax Act 2007, S56-S58 Corporation Tax Act 2010

There are restrictions on the amount of relief against other income available to limited partners in respect of losses and interest sustained or paid in connection with a trade carried on by a limited partnership.

Application

The restriction applies to:

  • trades but not professions or vocations,
  • limited partners within the meaning of the Limited Partnership Act 1907 - see BIM82101,
  • a limited member of a limited partnership formed under the law of an overseas country,
  • any person who puts themselves in the same position in practice as a limited partner in being bound by an agreement under which they are not entitled to take part in the management of the business and are protected from bearing unlimited liability for the debts and obligations of the partnership.

No restriction of relief against same trade

The legislation restricts relief against other income from other sources. It does not restrict relief against income derived from the same trade, whether of earlier or later years. Where relief for a trading loss is given against the general income of another chargeable period, which includes both trading income and non-trading income, relief is deemed to be given first against trading income from the same trade.

Reliefs restricted: individuals

In the case of individual limited partners, the reliefs which are subject to restriction are:

  • relief for trading losses against the claimant’s general income (see BIM85015) or capital gains (see BIM85025) of the same or preceding year;
  • relief for trading losses sustained in the first tax year in which the claimant carries on the trade, or in any of the next three tax years, against their general income of the preceding three years (see BIM85045).

These loss reliefs are commonly known as ‘sideways loss relief’. Detailed guidance on how to compute sideways loss relief restrictions for individual limited partners is at BIM82615 onwards.

There is also an annual limit of £25,000 on the amount of losses for a tax year for which sideways loss relief can be given to a limited partner; see BIM82611.

Reliefs restricted: companies

In the case of a corporate limited partner the reliefs, which are subject to restriction, are:

  • relief for losses against the total profits of the same or preceding accounting period (see CTM04500 onwards),
  • group relief (see CTM80100 onwards).

Calculation of limit of relief: corporate partners

In the case of a corporate limited partner, a comparison has to be made, at the end of the company’s own accounting period, between:

  • the total amount of relief already allowed together with the relief sought for the accounting period in question (or for the part of that period up to cessation of the limited partnership trade, if earlier), and
  • the company’s contribution to the firm at the end of the loss-making accounting period (or, if the company ceases to carry on the trade during the period, at the time it does so).

Relief against other income must never exceed the contribution to the firm. The reliefs to be brought into account in making that comparison are those listed above.

The company’s contribution to the firm is the total at the end of the company’s own accounting period of:

  • the amount the company has contributed to the firm as capital (including the company’s share of any profits so far as it has been added to the firm’s capital) and has not received back, directly or indirectly, and is not entitled to withdraw or have reimbursed to it, and
  • the amount of any profits from the limited partnership trade to which the company is entitled but has not received in money or in money’s worth and has not been added to the firm’s capital.

The profits for this purpose are to be taken as meaning profits of the trade as computed in the accounts, not as adjusted for tax purposes.

Giving guarantees in respect of money borrowed by the partnership does not count as the contribution of capital. You should ensure that borrowed finance is not presented as partners’ capital.

When tests applied

For corporate partners these tests should be applied at the end of the limited partner company’s own accounting period.

Where these dates coincide with the accounting date of the partnership, the partnership balance sheet can be used to compute the company’s contribution to the firm but in other cases a separate computation must be called for in support of any claim to relief. However, a balance sheet at say 31 March, may be taken as proxy for a computation as at 5 April.

Example

Corporate limited partner

1 May 2011 Limited partnership formed. Company A (limited partner) contributes £1,000 as capita  
     
30 April 2012 Partnership accounts prepared showing  
  Loss per accounts £10,000
  Capital allowances £8,000
  Total loss = £18,000
  Allocated to Company A £6,000
  Company A claims to surrender loss as group relief:  
  Contribution to the firm at 30/4/2012 £1,000
  ‘Relief already given at 30/4/2012 Nil
  Sum available for group relief £1,000
  Balance of loss £5,000 carried forward  
1 May 2012 Company A contributes a further £4,000 as capital  
30 April 2013 Partnership accounts prepared showing  
  Loss per accounts £12,000
  Capital allowances £4,000
  Total loss = £16,000
  Allocated to Company A £7,000
  Company A claims to surrender loss as group relief  
  Contribution to the firm at 30/4/2013  
  (£1,000 + £4,000) = £5,000
  Relief already given at 30/4/2013 £1,000
  Sum available for group relief £4,000
  Balance £8,000 (£5,000 + £7000 - £4,000) carried forward