BIM72615 - Partnerships: loss relief restrictions: limited partners

Limited partners for the purposes of restriction of loss reliefs include:

• Limited partners within the meaning of the Limited Partnership Act 1907 – see BIM72310.
• A limited partner of a limited partnership formed under the law of an overseas country.
• Any person who puts themselves, in practice, in the same position as a limited partner, in being bound by an agreement:

Limit of relief

The total sideways loss relief (see BIM72601) that a limited partner 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, see BIM72610.

For losses sustained by limited partners on or after 2 March 2007 the £25,000 annual limit for sideways loss relief also applies, see BIM72611.

Limited partner’s capital contribution

A limited partner’s capital contribution to the partnership at any given time for the purpose of loss relief restrictions is defined by ITA07/S105 as:

• The amount that the partner has contributed as capital,

less

• any ‘withdrawn capital’,

less

• any contribution where the financial cost of making the contribution may not be borne by the partner personally

plus

• the amount of any profits of the trade to which the partner is entitled but which they have not received in money or money’s worth.

The profits of the trade for this purpose means trading profits as computed in the accounts, not as adjusted for tax purposes.

Purpose test from 2 March 2007

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

The 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 relevant film-related expenditure. Guidance on what is relevant film- related expenditure is at BIM72614.

Withdrawn capital

‘Withdrawn capital’ in calculating a limited partner’s capital contribution at any given time is defined in ITA07/S105 as:

• Any capital contribution received back, directly or indirectly, by that time.
• Any amount that the partner is entitled to withdraw if they wish while they are a limited partner.
• Any amount that the partner may be entitled to require another person to reimburse to them.

Financial cost of contributions not borne by partner

ITA07/S114 gives HMRC powers to make regulations to exclude certain amounts from being treated as part of a partner’s capital contributions. These powers were introduced by FA05 to counter complex tax avoidance schemes, particularly used by partnerships in the film industry, in which partners’ capital contributions were boosted by amounts the cost of which they did not have to bear – for example partners’ contributions which were funded by limited recourse or non-repayable loans.

‘Recourse’ describes the extent to which the lender can require the borrower to use its funds, assets or revenues to pay a debt. If a loan is ‘full recourse’ the borrower is required to use any money, assets or revenues that it has to pay the debt when due. If a loan is ‘limited recourse’ the borrower can only be required to use certain money, assets or revenues identified in the loan document to repay the debt. A ‘non-recourse’ debt is one for which the borrower is not personally liable.

The Partnerships (Restrictions on Contributions to a Trade) Regulations 2005, which take effect from 2 December 2004, exclude amounts from being capital contributions in two situations:

• The first is where the partner takes out a loan to finance a contribution, and the loan is on limited or non-recourse terms, or the cost of repaying the loan is or may be borne, assumed or released by someone else. There is also a backup test which applies if the partner’s loan repayment costs over any period of 5 years are less than they would be on arm’s length commercial terms.
• The second is where arrangements are made so that the financial cost to the partner of making the contribution can be reimbursed by someone else.

The purpose of these Regulations is to prevent individual partners benefiting from sideways loss relief in excess of the financial cost of capital contributions which they actually lose or are at risk of losing.

Further guidance on amounts excluded in these situations is at BIM72655.

Partners’ guarantees

Guarantees given by partners in respect of money borrowed by the partnership does not count as the contribution of capital.

Partners’ loans to the partnership

Loans made by partners to the partnership do not count as the contribution of capital.