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HMRC internal manual

Business Income Manual

Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess loss allocation: the effect of the restrictions?

ITA2007/S116A(2) and S127C(2)

Where the restrictions apply, no loss relief is available to the individual for their losses from the partnership.


Example 1:

Basic example of when the provisions apply.

An LLP has 100 individual members and 1 company member. Each of the individual members introduces capital of £40,000 and the company member provides capital of £60m (total capital £100m). The LLP spends the £100m on an asset that qualifies for 100% upfront tax relief generating a £100m tax loss (but not an accounting loss) in the first year of business but with a significant income stream in later years. The profit sharing agreement provides that:

  • *In year 1, all the profits or losses are allocated to the individual members; and *
  • *In year 2 onwards, all or most of the profits are allocated to the company member. *


The LLP agreement is written so that the individuals can claim the loss relief. Allowing the individual to access the losses, rather than the non-individual is clearly one of the main purposes.

The excess loss allocation legislation prevents the individual obtaining relief for these losses.


Example 2:

The legislation can apply where the non-individual does not yet exist.

OPQ LLP is set up to run a business for its first few years when it is making a loss for tax purposes. The members of OPQ LLP are individuals, including P.

There are arrangements for the business to be sold to a subsidiary of the TFG Group when the business starts making profits. The TFG Group does not know what subsidiary will acquire the business, or whether it will form a new subsidiary for the purpose.

*As a member of the LLP, P is allocated a share of the loss. *

The legislation applies as P makes a trading loss as a member of the firm. This loss arises from the arrangements, to which P has signed up, that ensure that the loss is allocated to an individual, rather than arising to a subsidiary of the TFG Group, so that P and the other individuals can claim loss relief.

The excess loss allocation legislation prevents the individual obtaining relief for these losses.