BIM72613 - Partnerships: loss relief restrictions: annual limit: basis periods straddling 2 March 2007: examples

Example 1 – pre-announcement losses derived from capital allowances

A partnership has a trading loss of £400,000 for its accounting period 6 April 2006 to 5 April 2007, after deducting £500,000 capital allowances.

Non-active Partner A is allocated £100,000 of the loss for this period, which is also Partner A’s basis period for tax year 2006/07.

All of the £100,000 loss for Partner A’s basis period which straddles 2 March 2007 arises from capital allowances, the capital expenditure for which was paid by the partnership before 2 March 2007.

All of Partner A’s £100,000 loss for 2006/07 (basis period 6 April 2006 to 5 April 2007) is a pre-announcement loss, to which the £25,000 annual limit for sideways loss relief does not apply.

As there is no partnership loss before capital allowances are deducted, none of Partner A’s loss for the basis period straddling 2 March 2007 is a GAAP loss to which the time-apportionment rules for pre-announcement losses might apply.

Example 2 – GAAP losses: first capital contribution made on or after 2 March 2007

An individual (B) becomes a non-active partner in a trading partnership on 2 January 2007, but does not pay their first capital contribution to the partnership until 31 March 2007.

2006/07

Partner B’s basis period for tax year 2006/07 is 2/1/07 to 5/4/07.

£100,000 of the partnership’s trading loss for this period is allocated to Partner B, all of which arises from revenue expenditure deducted in the profit and loss account of the partnership for this period under generally accepted accounting practice (GAAP).

As Partner B had not paid a capital contribution to the partnership before 2 March 2007, none of their £100,000 loss for 2006/07 is a pre-announcement loss. The annual limit applies to all of Partner B’s loss for 2006/07.

The maximum sideways loss relief Partner B can claim for the 2006/07 loss is £25,000. It may be less than this if other restrictions (by reference to the amount of capital Partner B has contributed to the partnership) apply.

Example 3 – GAAP losses: first capital contribution made during straddling basis period but before 2 March 2007

An individual (C) becomes a non-active partner in a trading partnership on 1 October 2006 and pays £200,000 capital to the partnership on 1 February 2007.

2006/07

Partner C’s basis period for tax year 2006/07 is 1/10/06 to 5/4/07.

£200,000 of the partnership’s trading loss for this period is allocated to Partner C, all of which arises from revenue expenditure deducted in the profit and loss account of the partnership for this period under generally accepted accounting practice (GAAP).

Of the £200,000 loss for this basis period:

• £162,567 (152/187 days from 1/10/06 to 1/3/07) is a pre-announcement loss, to which the £25,000 annual limit does not apply
• £37,433 (35/187 days from 2/3/07 to 5/4/07) is a post-announcement loss, to which the £25,000 annual limit applies.

2006/07 loss for which Partner C can claim sideways loss relief is restricted to:

Example 4 – GAAP losses: first capital contribution on or before first day of straddling basis period

An individual (D) becomes a non-active partner in a trading partnership on 1 March 2006 and pays £100,000 capital to the partnership on 5 April 2006. The partnership prepares its accounts to 5 April each year.

2005/06

Partner D’s basis period for tax year 2005/06 is 1/3/06 to 5/4/06.

£100,000 of the partnership’s trading loss for this period is allocated to Partner D.

Partner D claims sideways loss relief for all of the 2005/06 loss of £100,000.

2006/07

Partner D’s basis period for tax year 2006/07 is 6/4/06 to 5/4/07 (a period which straddles 2 March 2007).

£150,000 of the partnership’s trading loss for this period is allocated to Partner D, all of which arises from revenue expenditure deducted in the profit and loss account of the partnership for this period under generally accepted accounting practice (GAAP).

Of the £150,000 loss for this basis period:

£135,616 (330/365 days from 6/4/06 to 1/3/07) is a pre-announcement loss, to which the £25,000 annual limit does not apply £14,383. (35/365 days from 2/3/07 to 5/4/07) is a post-announcement loss, to which the £25,000 annual limit applies. But before the annual limit is considered, the amount of the 2006/07 loss for which sideways loss relief can be claimed is restricted by reference to the amount of capital Partner D had contributed to the partnership by 5 April 2007.

Partner D claimed sideways loss relief for 2005/06 up to the full amount of their total capital contribution to the partnership (£100,000). The amount of 2006/07 loss for which Partner D can claim sideways loss relief is therefore restricted to Nil.

Example 5 – interaction of annual limit and ‘purpose test’

An individual (E) becomes a non-active partner in a trading partnership on 5 January 2006 and pays £100,000 capital to the partnership on 5 April 2006. The partnership prepares its accounts to 5 April each year.

2005/06

Partner E’s basis period for tax year 2005/06 is 5/1/06 to 5/4/06.

£100,000 of the partnership’s trading loss for this period is allocated to Partner E.

Partner E claims sideways loss relief for all of the 2005/06 loss of £100,000.

2006/07

Partner E’s basis period for tax year 2006/07 is 6/4/06 to 5/4/07 (a period which straddles 2 March 2007).

£900,000 of the partnership’s trading loss for this period is allocated to Partner E, all of which arises from revenue expenditure deducted in the profit and loss account of the partnership for this period under generally accepted accounting practice (GAAP).

Of the £900,000 loss for this basis period:

• £813,699 (330/365 days from 6/4/06 to 1/3/07) is a pre-announcement loss, to which the £25,000 annual limit does not apply
• £76,301 (35/365 days from 2/3/07 to 5/4/07) is a post-announcement loss, to which the £25,000 annual limit applies.

On 31 March 2007 Partner E pays a further capital contribution of £1,000,000.

The amount of the 2006/07 loss for which Partner E can claim sideways loss relief depends on the purpose for making the further capital contribution on 31/3/07.

If the capital contributed on 31/3/07 was for a prohibited purpose, no sideways loss relief can be claimed for any of the £900,000 loss. Partner E’s relevant capital contributions would only be £100,000, for which amount sideways loss relief has already been claimed for the 2005/06 loss.

If the capital contributed on 31/3/07 was not for a prohibited purpose, sideways loss relief for the 2006/07 loss is restricted to: