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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess loss allocation

ITA07/S116A and S127C

Partnerships and UK LLPs are governed by the agreements between the partners/members. This allows flexibility in the arrangements for allocating profits and losses.

The excess loss allocation rules are designed to counter avoidance arrangements using mixed membership partnerships, which aim to secure the availability of tax losses to individuals.

In a typical case, arrangements are made between a company and wealthy individuals, where the individuals will contribute funding to a business venture in return for the losses generated in the early years of the partnership, perhaps through capital allowances. The losses will be less valuable to the company than to the individuals, who are taxable at higher income tax rates. When the business becomes profitable, the individual members will have their contribution returned and they will withdraw from the partnership.

The rules ensure that individuals do not get tax relief where there are tax-motivated arrangements in place which mean that losses are allocated to the individual, or a group of individuals, rather than to a company or other non-individual in order to gain a tax advantage.


To which losses to the restrictions apply?

The restriction applies to relief for trade or property business losses and also to claims to use trading losses as relief for capital gains.