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HMRC internal manual

Business Income Manual

Computing the amount to assess: Partnerships - loss relief restrictions: Recovery of excess relief - example

Partner A is an active member of an LLP which carries on a trade and makes its accounts up to 31 March each year.

Capital contributions

On 1 April 2011 Partner A contributes capital of £100,000 to the LLP. This is financed by £20,000 of A’s own money and £80,000 which A borrows from a bank on full recourse terms.

On 1 April 2012 Partner A withdraws £10,000 capital from the LLP.

On 1 April 2013 the bank assigns Partner A’s loan to another lender who, as part of arrangements entered into with A at that time, agrees to not to require repayment of the loan of £80,000. This is a chargeable event which may trigger recovery of excess loss relief already given.

Sideways loss relief claimed

Partner A has claimed the following sideways loss reliefs for his share of the LLP’s losses:

Year ended 31 March 2012: £80,000.

Excess relief

As a result of the chargeable event on 1 April 2013 Partner A’s capital contribution is reduced to £10,000 (£100,000 less £10,000 less £80,000).

The recovery Income Tax charge on Partner A for 2012/13 is £70,000, which is the smallest of:

  • total sideways relief claimed (£80,000) less reduced capital contribution as at 1 April 2013 (£10,000) = £70,000,
  • amount by which capital contribution is reduced by the Regulations = £80,000,
  • total post 1 December 2004 losses for which sideways loss relief claimed = £80,000.

Partner A should include £70,000 as ‘other taxable income’ on their tax return for 2012/13.