BIM72135 - Partnerships: Limited Liability Partnership (LLP): restriction of relief for LLP members

You should allow a member of a LLP relief for the share of the LLP’s trading or professional losses allocated to them in the same way as you allow relief to partners in a general partnership.

In certain circumstances the amount of sideways loss relief which a member of a LLP that carries on a trade, might otherwise be entitled to, is restricted. ITA07/S107-110(restriction of loss relief for individuals) and ICTA88/S118-118ZB(restriction of loss relief for companies) - see BIM72105 - to members of a LLP that carries on a trade. These restrictions only apply to a LLP that carries on a trade. They do not apply to a LLP that carries on either a profession or an investment business that does not amount to a trade.

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 LLP members, 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 and 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 loss relief restrictions for individual LLP members is at BIM72625 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 non-active LLP member, 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 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 LLP members

ICTA88/S118ZC establishes the limit of tax relief for trading losses that corporate members of a LLP can claim against their income other than that from the LLP. The calculation is similar to that for corporate limited partners under ICTA88/S118 explained at BIM72105, but is subject to the amendments included in ICTA88/S118ZC and ICTA88/S118ZD.

The limit for relief that can be claimed by a member is the amount of their contribution to the trade of the LLP.

A member’s ‘contribution’ to a trade at any time (‘the relevant time’) is the greater of:

1. the ‘amount subscribed’ by the member to the LLP, and
   
   
2. the amount of the member’s ‘liability on a winding up’.

The ‘amount subscribed’ by a member of a LLP is the amount they have contributed as capital to the LLP less so much of that amount (if any) as the member:

3. has previously directly or indirectly drawn out or received back,
   
   
4. draws out or receives back during the period of 5 years beginning with the ‘relevant time’,
   
   
5. is or may be entitled so to draw out or receive back at any time when they are a member of the LLP, or
   
   
6. is or may be entitled to require another person to reimburse them.

The amount of a LLP’s member ‘liability on a winding up’ is the amount which the member:

7. is liable to contribute to the assets of the LLP in the event of its being wound up, and
   
   
8. remains liable so to contribute for the period of at least 5 years beginning with the relevant time (or until it is wound up if that happens to end before the end of that period).

Unlike ICTA88/S118, the undrawn profits of a member of a LLP cannot normally be added to their subscribed capital in order to calculate the limit of their entitlement to sideways loss relief. This is because, subject to any agreement between them, a member’s undrawn profit is normally regarded as a debt of the LLP. This means that the member ranks, for that sum, alongside the other creditors in the event of liquidation. If however the terms of the agreement between the members specifically provide that the undrawn profit stands as part of a member’s capital contribution and that agreement is unconditional then you should take that amount into account in calculating the limit.

Where a member of a LLP makes a capital contribution to a partnership in order to meet a liability for negligence for which they are personally responsible then that amount is to be taken into account in determining the amount of their capital contribution to the partnership for the purposes of ICTA88/S118ZC. That partner is entitled, provided the conditions for the relief are otherwise met, to relief up to a maximum of the amount of their additional contribution under the normal sideways loss relief provisions.

Further capital contributions

ICTA88/S118ZD provides that a member of a LLP, who has had their loss relief restricted to their capital contribution in an earlier chargeable period, may obtain relief on making a further capital contribution in a later chargeable period.

Where a member of a LLP is prevented from obtaining relief for their share of the LLP’s trading loss sustained in an earlier chargeable period, because the amount of that relief was restricted to their ‘contribution’ at that time, then the member may be entitled to relief for the balance of that loss (‘the unrelieved loss’) in a subsequent chargeable period in which they make a further ‘contribution’ to the LLP; provided that at the time the further contribution is made they are a member of the LLP.

If these rules are satisfied then ICTA88/S118ZD (2) provides that, for corporate LLP members, ICTA88/S393A (1) and ICTA88/S403 will have effect in relation to the later chargeable period when the further capital contribution is made as if:

9. any loss sustained or incurred by the member in that later chargeable period was increased by an amount equal to the unrelieved loss, or
   
   
10. if no loss is sustained or incurred a loss of that amount were so sustained or incurred.

In order to arrive at the amount of a member’s total ‘unrelieved loss’ remaining outstanding in the later chargeable period, you should deduct any relief if:

11. given under any of the provisions of the Tax Acts in this or an earlier chargeable period (otherwise than under ICTA88/S118ZD (2)), and
    
    
12. given or allowed under ICTA88/S118ZD (2) for an earlier chargeable period (or would have been given or allowed had a claim been made).

The amount of the additional relief given in respect of the ‘unrelieved loss’ for a particular chargeable period is restricted to the capital contribution made in that period. If there still remains a balance of ‘unrelieved loss’ further relief may be due for a later chargeable period if a further capital contribution is made in that later period.