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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Partnerships - loss relief restrictions: introduction

A number of anti-avoidance measures have been introduced to counter arrangements which seek to exploit relief for trading losses that individuals in partnerships may set against their other income or gains. 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 are commonly referred to as ‘sideways loss reliefs’.

Some of the arrangements addressed by the restrictions involved the allocation of losses to particular partners that were greater than the financial contribution to the partnership that the partner was at risk of losing. Others created large losses initially which a partner could set against other income, but sought to avoid tax on later income flows by the partner leaving the partnership before the majority of the income arose.

These arrangements were particularly, but not exclusively, found in partnerships involved in the film industry where advantageous tax reliefs commonly used to create large losses for tax purposes in early years of trading. See BIM56000 onwards.

Legislation to counter these arrangements falls into two groups:

  • restrictions on the extent to which certain partners can set their share of the partnership’s trading losses against their other income or gains,
  • ‘exit charges’ imposed on certain partners who obtain a tax advantage by exiting from partnerships carrying on certain trades, after they have claimed sideways loss relief for losses incurred in the trade.

The restrictions do not apply to professions or vocations.

Taxpayers are responsible for limiting their own claims to sideways loss relief, and for calculating any exit charges, in accordance with the relevant anti-avoidance legislation.

Loss relief restrictions - general

Restrictions on sideways relief apply to:

  • limited partners,
  • members of limited liability partnerships (LLPs),
  • non-active partners (including non-active LLP members) - these restrictions apply to losses sustained in early years of trading,
  • partners in certain film partnerships where there is an agreement which guarantees the partner an amount of income - these restrictions apply to losses sustained in early years of the trade - see BIM56510.

A non-active partner for this purpose is a partner who does not spend, on average, at least ten hours a week personally engaged in activities carried on for the purposes of the trade.

Restrictions by reference to partner’s capital contribution

As a first step, the total amount of sideways loss relief that can be given to an affected partner in respect of losses from a trade carried on in partnership is broadly restricted to the individual’s capital contribution to the partnership which the partner is at risk of losing. Further guidance on calculating the limit of the relief by reference to partners’ capital contributions is at BIM82610.

Annual limit

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 limited partners, non-active LLP members and non-active general partners; see BIM82611.

The £25,000 annual limit applies after restrictions by reference to partners’ capital contributions have been applied.

The annual limit does not apply to trading losses derived from:

  • qualifying film expenditure, see BIM82610,
  • a Lloyd’s underwriting business.

Tax-generated losses

A loss arising from relevant tax avoidance arrangements is subject to the general restriction of relief for tax-generated losses - see BIM85761- BIM85762.

No restriction of reliefs against income of the same trade

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

Exit charges

Amounts are charged to income tax on certain partners when they exit from a partnership if they have previously claimed sideways loss relief in respect of:

  • licence-related losses - where the trading losses are derived to any extent from expenditure incurred in exploiting a licence; see BIM82685,
  • film-related losses - where specific film reliefs legislation has been applied in computing the losses of the trade; see BIM56615 onwards.

Is there a trade?

A valid claim for sideways loss relief can only be made by a partner if the losses are from a trade, profession or vocation. If there is no trade then the restrictions in this guidance are not relevant - no sideways loss relief is due. Particularly in avoidance cases, therefore, consideration should be given to whether a trade is being carried on before considering the application of the restrictions.

In Samarkand Film Partnership No 3 v HMRC [2012] UKFTT610 (TC), two partnerships claimed sideways loss relief for losses incurred from the sale and leaseback of films. The First-tier Tribunal decided that the partnerships were not trading and that the partners were not entitled to sideways loss relief.