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HMRC internal manual

Business Income Manual

Partnerships - loss relief restrictions: non-active partners in early tax years

S103B, S110-S113 Income Tax Act 2007

A non-active partner for this purpose means a partner (including a LLP member, but excluding a limited 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.

The restrictions only apply to losses made by non-active partners in early years of trading, that is the tax year in which the individual first started to carry on the trade and the next three tax years after that.

Limit of relief - general rules

The total sideways loss relief (see BIM82601) that a non-active partner may be given in respect of their share of the partnership trading losses sustained for an early year of trading is restricted to:

  • the partner’s capital contribution to the partnership at the end of that tax year,


  • the total of all relevant sideways loss reliefs previously given to the partner at any time in respect of losses from the same trade (reduced by any recovered relief), see BIM72610.

A comparison has to be made between:

  • the total amount of sideways loss relief (see BIM82601) in respect of losses from the same trade already allowed together with the relief sought for the year less the total amount of recovered relief (see BIM82610), and
  • the individual’s contribution to the partnership at the end of the basis period for the loss-making tax year.

The total sideways relief must never exceed the contribution to the partnership.

For losses sustained by non-active partners, the £25,000 annual limit for sideways loss relief also applies, see BIM82611.

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

Purpose test

Capital contributions paid by a non-active partner or a non-active LLP member on or after 2 March 2007 (whether in an early year of trading or in a later year) do not count if the main purpose, or one of the main purposes, for contributing them to the partnership is for the partner to reduce their tax liability through sideways loss relief.

The purpose test does not apply to any loss derived solely from qualifying film expenditure. See BIM82610.

Non-active LLP member’s capital contribution

A non-active LLP member’s capital contribution at any given time is broadly the same as the definition of capital contribution which applies to all other LLP members; see BIM82620.

The main difference is that only amounts actually contributed on a winding-up count for non-active members. Limiting the winding up provision only to liabilities that actually arise and are met by the partner removes the possibility of exploitation by including theoretical liabilities in a future winding up which are unlikely to materialise in practice.

Non-active general partner’s capital contribution

The capital contribution of any other non-active partner (excluding limited partners and LLP members) at any given time is:

  • the amount that the partner has contributed as capital (including any of the partner’s share of the profits of the partnership so far as that share has been added to the partnership’s capital),


  • any withdrawn capital,


  • any contribution where the financial cost of making the contribution may not be borne by the partner personally,


  • the amount of any profits of the trade to which the partner is entitled but which have not been added to the partnership’s capital or which the partner has not received in money or money’s worth. Profits for this purpose means trade profits as computed in the accounts, not as adjusted for tax purposes.

Withdrawn capital

‘Withdrawn capital’ for this purpose has the same meaning as for LLP members, see BIM82625.

Financial cost of contributions not borne by partner

In excluding contributions because the financial cost of making them may not be borne by the partner personally, the rules which apply for non-active partners are the same as for limited partners and LLP members, see BIM82615 and BIM82625.

Further guidance on amounts excluded in these situations is at BIM82655.

Partners’ guarantees

Guarantees given by partners in respect of money borrowed by the partnership does not count as the contribution of capital.

Partners’ loans to the partnership

Loans made by partners to the partnership do not count as the contribution of capital.