BIM72605 - Partnerships: loss relief restrictions: overview

There are restrictions on the extent to which certain partners can set their share of the partnership’s trading losses against their other income or against their capital gains. The restrictions do not apply to professions or vocations.

This section is about restrictions for individuals making losses from trading in partnership.

Guidance on loss relief restrictions for companies in partnership is at BIM72105 (corporate limited partners) and BIM72135 (corporate members of limited liability partnerships).

Partners affected

The partners affected are individuals who are:

• Limited partners – see BIM72615.
• Members of Limited Liability Partnerships – see BIM72625.
• Non-active partners (including non-active LLP members) – see BIM72640.

A non-active partner for this purpose is a partner who does not spend, on average, at least 10 hours a week personally engaged in activities carried on for the purposes of the trade (ITA07/S103B).

Reliefs restricted

For individuals carrying on a trade in partnership the loss reliefs which are subject to restriction are:

• Setting trading losses against the partner’s income from other sources for the same or preceding year (ITA07/S64).
• Setting trading losses against the partner’s capital gains for the same or preceding year (TCGA92/S261B).
• Setting trading losses sustained in the first tax year in which the partner carries on the trade, or in any of the next three tax years, against the partner’s other income of the preceding three years (ITA07/S72).

These are commonly referred to as ‘sideways loss reliefs’.

Calculating the restricted relief

There are two kinds of restriction on the amount of losses for which affected partners can claim sideways loss relief:

• Restrictions by reference to the amount of capital contributed by the individual to the partnership, see BIM72610
• An annual limit of £25,000 which applies from 2 March 2007.

Restrictions by reference to partner’s capital contribution

As a first step, the total amount of ‘sideways loss relief’ that can be given to an affected partner in respect of losses from a trade carried on in partnership is broadly restricted to the individual’s capital contribution to the partnership which the partner is at risk of losing. Further guidance on calculating the limit of the relief by reference to partners’ capital contributions is at BIM72610.

Annual limit for losses sustained on or after 2 March 2007

Also, 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 limited partners, non-active LLP members and non-active general partners, see BIM72611.

The £25,000 annual limit applies after restrictions by reference to partners’ capital contributions have been applied.

No restriction of reliefs against income of the same trade

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