BIM72610 - Partnerships: loss relief restrictions: calculation of limit of relief: partners’ capital contributions

The first step in calculating restrictions on sideways loss relief for affected partners is to apply those restrictions which are based on the individual partner’s capital contributions to the partnership.

The second step, for losses sustained on or after 2 March 2007, is then to restrict sideways loss relief to an annual limit of £25,000, see BIM72611.

Partner’s capital contributions - general

Under the first step, the general approach is that the total sideways loss relief that an affected partner (see BIM72605) may be given in respect of their share of partnership trading losses sustained for a tax year is restricted to:

• The partner’s capital contribution to the partnership at the end of that tax year,

less

• the total of all relevant sideways loss reliefs (reduced by any recovered relief) previously given to the partner at any time in respect of losses from the same trade.

The definition of what constitutes the partner’s contribution to the partnership at any given time differs for limited partners, Limited Liability Partnership (LLP) members and non-active partners.

Guidance on how to calculate a particular partner’s contribution to the partnership is:

• For limited partners, at BIM72615.
• For LLP members, at BIM72625.
• For non-active partners (including non-active LLP members), at BIM72640.

Partner’s capital contributions - purpose test from 2 March 2007

For all affected partners. capital contributions paid on or after 2 March 2007 do not count if the main purpose, or one of the main purposes, for contributing the capital to the partnership is for the partner to reduce their tax liability through sideways loss relief (ITA07/S113A).

This ‘purpose test’ does not apply to capital contributions made to a partnership carrying on a film-related trade where the trading loss for which the partner is claiming sideways loss relief is derived solely from qualifying film-related expenditure. Guidance on qualifying film-related expenditure is at BIM72614.

Relevant sideways loss reliefs

Relevant sideways loss reliefs are those previously given to the partner at any time in respect of losses from the same trade by setting:

• trading losses against the partner’s income from other sources for the same or preceding year (ITA07/S64),
• trading losses against the partner’s capital gains for the same or preceding year (TCGA92/S261B),
• 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 their other income of the preceding three years (ITA07/S72).

Recovered relief

Anti-avoidance legislation introduced by FA05/S74 to counter partnership loss manipulation schemes (mainly involving partnerships in the film industry) included scope for past sideways loss reliefs given to affected partners to be recovered in certain circumstances. Reliefs are recovered by the partner being charged to tax on an amount treated as income of a later year. Guidance on the circumstances in which past loss reliefs claimed by affected partners can be recovered is at BIM72675.