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HMRC internal manual

Business Income Manual

Partnerships - loss relief restrictions: recovery of excess relief

S791-S795 Income Tax Act 2007

Excessive sideways loss relief may have been given to a partner where, after the claim to relief has been made, an event occurs as a result of which an amount is excluded by the Regulations referred to at BIM82655 from counting as a capital contribution by that partner.

A charge to Income Tax on the partner concerned applies effectively to recover excessive relief given, where:

  • an affected partner has claimed sideways relief for a loss made after 1 December 2004, and
  • after the claim is made an amount is excluded by the Regulations from being a relevant capital contribution (a ‘chargeable event’), and
  • as a result of excluding that amount the total sideways loss reliefs given to the partner in respect of losses from the same trade exceed the partner’s (reduced) capital contribution.

The most likely trigger for a recovery charge is where the cost of making the partner’s capital contribution is borne by someone else, other than under an agreement or arrangement which existed when the contribution was first made.

If an agreement or arrangement exists when the contribution was first made, the contribution will be excluded from the outset and sideways loss relief restricted accordingly from the outset.

How excess relief is recovered

The excess relief is recovered by means of the partner concerned being chargeable to Income Tax on an amount of income for the tax year in which the chargeable event occurred.

The chargeable amount is subject to a stand-alone Income Tax charge , not as trading income.

Amount chargeable

The amount chargeable is the smallest of:

  • the amount by which the partner’s contribution to the partnership is reduced as a result of the application of the Regulations,
  • the total post 1 December 2004 losses claimed by the partner immediately after the chargeable event occurred less any previously recovered relief,
  • the amount by which the total sideways relief claimed by the partner for losses of the same trade (less any previously recovered relief) exceeds the partner’s (reduced) capital contributions after the chargeable event occurs.

An example showing how to compute the chargeable amount is at BIM82680.

Losses sustained after 1 December 2004

Where a basis period straddles 1 December 2004 the losses sustained by the partner after 1 December 2004 are the losses from the period beginning with 2 December 2004 and ending with the end of the straddling basis period. These losses are arrived at by computing the losses of the partnership for this period, as if it were a period of account of the partnership, and allocating those losses between the partners according to their interests in the partnership during that period.