BIM72625 - Partnerships: loss relief restrictions: LLP members
All members of limited liability partnerships (LLPs) established
under the LLP Act 2000 (see
BIM72110) are subject to restrictions on
the extent to which they can set their share of trading losses made
by the LLP against their other income or capital gains.
From 10 February 2004 there are more stringent restrictions
for non-active LLP members in early years of trading, see
BIM72640. The guidance below applies to
all other LLP members (and to non-active LLP members in later years
of trading).
Limit of relief
The total sideways loss relief (see BIM72601) that an LLP member may be given in respect of their share of the LLP’s trading losses sustained for a tax year is restricted to:
- The member’s capital contribution to the LLP 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 member at any time in respect of losses from the same trade, see BIM72610.
For losses sustained by a non-active LLP member on or after 2 March 2007 (whether in an early year of trading or in a later year) the £25,000 annual limit for sideways loss relief also applies, see BIM72611.
Purpose test from 2 March 2007
Capital contributions paid by a non-active LLP member on or
after 2 March 2007 (whether in an early year of trading or in a
later year) 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,
see
BIM72640.
The purpose test does not apply to capital contributions made
by ‘active’ LLP members.
LLP member’s capital contribution
An LLP member’s contribution to the LLP at any given time for the purpose of loss relief restrictions is defined in ITA07/S108 as:
- The amount that the member has contributed to the LLP 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- any ‘withdrawn capital’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 the member’s liability on a winding-up.
Withdrawn capital
‘Withdrawn capital’ in calculating an LLP member’s capital contribution at any given time is defined in ITA07/S108 as any amount contributed as capital that the member:
- has previously drawn out or received back, directly or indirectly,
- draws out or receives back in the 5 year period starting with the time at which the amount of the member’s contribution is being calculated,
- is or may be entitled to draw out or receive back at any time when the individual is a member of the LLP,
- is or may be entitled to require another person to reimburse to them.
The ‘draws out or receives back’ 5 year rule is to
prevent a member increasing their capital contributions temporarily
to inflate the amount of trading losses that they can set against
their other income or gains. If the member withdraws any capital
from the LLP within 5 years of the time that their contribution was
calculated for loss relief purposes, the extent to which they can
claim loss relief under ITA07/S64 or ITA07/S72 is reduced.
There is no specific provision for a tax charge to claw back
all or part of the relief already given if a member withdraws any
capital from the LLP within 5 years of the time that their
contribution was calculated for loss relief purposes. The
‘discovery’ rules of TMA70/S29 (assessment where loss
of tax discovered) should be used to go back and restrict the
original amount of relief given.
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.
LLP member’s liability on a winding-up
A member’s liability on a winding-up is defined in ITA07/S108 (8) as the amount which:
- the individual is liable to contribute to the assets of the LLP
in the event of it being wound up, and
- the individual remains liable to contribute for a period of at least 5 years beginning with the relevant time (or until it is wound up, if that happens before the end of that period).
Under the LLP Act 2000 all LLP members act as agents of the LLP
and are not personally liable for its debts. If the LLP becomes
insolvent the members’ liability, under the LLP Act, is
limited to their investment in the LLP and they cannot be required
to contribute to any shortfall out of their private assets. Their
position is similar to that of company shareholders.
However, although LLP members are not personally liable under
the LLP Act for the debts of the LLP, and are not required by law
to contribute to any shortfall out of their private assets, they
may have accepted such liability under the terms of an agreement.
Basing the restriction on the amount of the member’s
liability on a winding up, if that is greater than the amount
subscribed by the member, was exploited by schemes which accredited
to members unrealistically high liabilities in a winding up, that
in practice were never likely to materialise. For this reason this
approach was not followed when further restrictions were introduced
by FA04 for losses sustained by non-active members of LLPs and by
non-active general partners, see
BIM72640.
Contributions to meet negligence claims
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, that amount is to be taken into account in determining the amount of their capital contribution to the LLP for the purposes of ITA07/S108. That member 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 either the normal sideways loss relief provisions, or under ITA07/S96 (post-cessation expenditure) if they have left the LLP or the LLP has ceased business.
Undrawn profits
In an LLP any undrawn profits are normally regarded as a debt of the LLP and so are not normally added to the member’s subscribed capital.
Members’ guarantees
Guarantees given by members in respect of money borrowed by the LLP does not count as the contribution of capital.
Members’ loans to the LLP
Loans made by members to the LLP do not count as the contribution of capital.
