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HMRC internal manual

Lloyd's Manual

Conversion: Scottish limited partnerships: restriction of loss relief

ICTA88/S117, ITA07/S104 and ICTA88/S118 prevent a limited partner from obtaining relief for losses incurred under certain provisions, including ICTA88/S380 and ITA07/S64 relief and ICTA88/S381 and ITA07/S72 relief, unless an adequate capital contribution has been made to the partnership before the end of the tax year in which the loss is sustained (explained at BIM72105 - see LLM10000).

The appropriate time of the contribution

The adequate capital contribution is defined as the partner’s contribution to the trade at the appropriate time. This is the end of the tax year in which the loss is taken into account for tax purposes. For example, if an SLP is a member of a 2003 syndicate which makes a loss, that loss, for individual members, will be declared and assessed in 2006-2007. The appropriate time is the end of 2006-2007, so any capital contribution by an individual must be made by 5 April 2007 to qualify for ICTA88/S117 and ITA07/S104 purposes. For a corporate member, the appropriate time under ICTA88/S118 will be 31 December 2006, since this is the last day of the AP in which the loss for an earlier underwriting year is declared.

The contribution must be permanent

The contribution to the trade must be permanent, and not be capable of withdrawal. Neither the provision of funds in the form of a letter of credit or guarantee, nor the making of a payment by the issuing bank or insurance company, nor the provision of a third party deposit, will be regarded as a contribution of capital. A subsequent drawing down of these funds by Lloyd’s will be regarded as a contribution of capital for these purposes, provided that the drawing down of the funds is treated as a capital contribution under the Limited Partnerships Act 1907 and registered as such.

An amount credited to the capital account of a partner who contributes syndicate capacity to the partnership will be accepted as an amount which the limited partner has contributed, provided that the amount is registered as a capital contribution under the Limited Partnerships Act 1907. The entrance fee for the SLP (but not annual fees) will also qualify as capital for these purposes, again provided that it is registered as a capital contribution.

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Losses declared but not called

There is an important distinction between SLP members and other members. If losses have been declared, but not called, then no relief will be due for these losses if sufficient capital has not been contributed to the trade. ‘Called’ in this context means that no cash call has been made by Lloyd’s to cover the loss.

The provisions may restrict the use of partnership losses in respect of the first two underwriting years. Certain expenses for which loss relief is available before the profit or loss in the first underwriting year is declared may exceed partnership capital contributions and retained profits. Limited partners will not be able to set their share of these losses against other income or gains. These losses can only be carried forward and set against other underwriting profits when they are declared. Examples of such expenses are accountancy costs, members’ agents fees and letter of credit fees.

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Losses when there is a partnership profitable overall

Under the partnership agreement a partner may be able to give notice before an agreed date in the year of intention to resign. However, the partner’s Funds at Lloyd’s will not be released until all the open years of all syndicates on which the SLP participated when the partner was underwriting have closed.

A further restriction can therefore arise where a partner has ceased underwriting, but is waiting for all of the participation accounts to close. In these circumstances, it is possible that the partnership overall may be making a profit, while the individual partner makes a loss. In these cases, no relief can be given to the partner for that loss. The partner is treated as having made neither a profit nor a loss for the relevant account.

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General partnership trade loss relief cap: section 103C ITA 2007

The £25,000 cap introduced by FA07/SCH4/PARA1 does not apply to partners in a partnership which is a member of Lloyd’s - ITA07/S103C (8).