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
| 1 May 2000 | Limited Partnership formed. Company A (limited partner) contributes £1,000 as capital | |
| 30 April 2001 | Partnership accounts prepared showing | |
| Loss per accounts | £10,000 | |
| Capital allowances | £8,000 | |
| Total loss = | £18,000 | |
| Allocated to Company A | £6,000 | |
| Company A claims to surrender loss as group relief: |
|
|
| ‘Relevant sum’ at 30/4/2001 | £1,000 | |
| ‘Aggregate amount’ at 30/4/2001 | Nil | |
| Sum available for group relief | £1,000 | |
| Balance £5,000 carried forward under ICTA88/S393 (1) |
|
|
| 1 May 2001 | Company A contributes a further £4,000 as capital | |
| 30 April 2002 | Partnership accounts prepared showing |
|
| Loss per accounts | £12,000 | |
| Capital allowances | £4,000 | |
| Total loss = | £16,000 | |
| Allocated to Company A | £7,000 | |
| Company A claims to surrender loss as group relief |
|
|
| ‘Relevant sum’ at 30/4/2002 |
|
|
| (£1,000 + £4,000) = | £5,000 | |
| ‘Aggregate amount’ at 30/4/2002 | £1,000 | |
| Sum available for group relief | £4,000 | |
| Balance £8,000 (£5,000 + £7000 – £4,000) carried forward under ICTA88/S393 (1) |
