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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.