BIM72105 - Partnerships: Limited partnership: restriction of relief for limited partners

Following the decision in the case of Reed v Young [1986] 59TC196, legislation was introduced (which is now at ITA07/S104 and ICTA88/S118) which imposes restrictions on the amount of relief against other income available to limited partners in respect of losses, capital allowances and interest sustained or paid in connection with a trade carried on by a limited partnership.

Application

The restriction applies to:

• trades but not professions or vocations,
• limited partners within the meaning of the Limited Partnership Act 1907 - see BIM72310,
• a limited member of a limited partnership formed under the law of an overseas country,
• any person who puts themselves in the same position in practice as a limited partner in being bound by an agreement that they are not be entitled to take part in the management of the business, and whereby they are protected from bearing unlimited liability for the debts and obligations of the partnership (ITA07/S103A and ICTA88/S118).

No restriction of relief against same trade

The legislation restricts relief against other income from other sources. It does not restrict relief against income derived from the same trade, whether of earlier or later years. Where relief for a trading loss is given against the total income of another chargeable period, which includes both trading income and non-trading income, relief is deemed to be given first against trading income from the same trade.

Reliefs restricted: individuals

In the case of individual limited partners, the reliefs which are subject to restriction are:

• relief for trading losses against the claimant's total income or capital gains of the same or preceding year (ITA07/S64 or TCGA/S261B),
• relief for trading losses sustained in the first year of assessment in which the claimant carries on the trade, or in any of the next three years of assessment, against their total income of the preceding three years (ITA07/S72), and
• relief for interest paid on or before 1 December 2004 on money borrowed to lend to the partnership, or borrowed for the purposes of carrying on the limited partnership trade (ICTA88/S353).

These loss reliefs are commonly known as “sideways loss relief”. Detailed guidance on how to compute sideways loss relief restrictions for individual limited partners is at BIM72615 onwards.

For losses sustained on or after 2 March 2007 there is an annual limit of £25,000 on the amount of losses for a tax year for which sideways loss relief can be given to a limited partner, see BIM72611.

Reliefs restricted: companies

In the case of a corporate limited partner the reliefs, which are subject to restriction, are:

• relief for losses against the total profits of the same or preceding accounting period (ICTA88/S393A (1)),
• relief for capital allowances to be given by discharge or repayment, which arise by virtue of participation in the limited partnership (CAA01/S259),
• relief for interest or charges (ICTA88/S338),
• group relief for losses, capital allowances given by discharge or repayment or charges (ICTA88/S403 (1), (2) and (7)).

Calculation of limit of relief: corporate partners

In the case of a corporate limited partner, a comparison has to be made, at the end of the company's own accounting period, between:

• the ‘aggregate amount’ of relief already allowed, and
• the ‘relevant sum’ contributed.

Relief against other income must never exceed the relevant sum. The ‘aggregate amount’ is the total, as at the end of the company’s accounting period, of all relief allowed against other income under any of the reliefs listed above.

The ‘relevant sum’ is the total at the end of the company's own accounting period of:

• the amount the company has contributed to the trade as capital, and has not received back, directly or indirectly, and is not entitled to withdraw if they wish, and
• the amount of any ‘trading profits’ or gains of the trade to which the company is entitled but has not received in money or in money's worth.

‘Trading profits’ is to be taken as meaning trading profits as computed in the accounts, not as adjusted for tax purposes.

Giving guarantees in respect of money borrowed by the partnership does not count as the contribution of capital. You should ensure that borrowed finance is not presented as partners' capital.

When tests applied

For corporate partners these tests should be applied at the end of the company's own accounting period.

Where these dates coincide with the accounting date of the partnership, the partnership balance sheet can be used to compute the ‘relevant sum’ but in other cases a separate computation must be called for in support of any claim to relief. However, a balance sheet at say 31 March, may be taken as proxy for a computation as at 5 April.

Example

Corporate limited partner