BIM72640 - Partnerships: loss relief restrictions: non-active partners

A non-active partner for this purpose means a partner (including a Limited Liability Partnership (LLP) member, but excluding a limited 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.

The restrictions only apply to losses made by non-active partners:

• in early years of trading, and
• in respect of losses sustained on or after 10 February 2004.

Early years of trading for this purpose means the year in which the individual first started to carry on the trade and the next 3 years after that.

Limit of relief – general rules

The total sideways loss relief (see BIM72601) that a non-active partner may be given in respect of their share of the partnership trading losses sustained for an early year of trading 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 previously given to the partner at any time in respect of losses from the same trade (reduced by any recovered relief), see BIM72610.

For losses sustained by non-active partners 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 partner or 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 (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.

Losses sustained before 10 February 2004

The commencement provisions for the restrictions on loss reliefs for non-active partners are quite complex for partners’ basis periods which straddle 10 February 2004, for the reasons explained at BIM56542 in relation to film partnership avoidance schemes.

In summary:

• for partners who joined the partnership before 26 March 2004 the new restrictions do not restrict relief for the partner’s share of losses sustained by the partnership before 10 February 2004,
• to calculate losses sustained before 10 February 2004 there is a deemed accounting date at 9 February 2004, and losses must be computed with regard to income earned and expenditure incurred before 9 February 2004 (including capital allowances for a period straddling 10 February 2004 if they relate to capital expenditure incurred on or before 9 February 2004),
• if a partner’s share of losses sustained before 10 February 2004 is greater than or equal to their capital contribution, then there can be no further sideways loss relief for losses sustained on or after that date,
• if a partner’s share of losses sustained before 10 February 2004 is less than their capital contribution, then sideways loss relief for losses sustained on or after that date is restricted to the extent that the partner’s capital contribution exceeds total sideways relief given for losses of the same trade sustained before 10 February 2004,
• a partner who joined the partnership on or after 26 March 2004 cannot claim sideways loss relief for their share of any of the partnership’s trading losses in excess of their capital contribution, whenever the trading losses were sustained by the partnership.

Non-active LLP member’s capital contribution

A non-active LLP member’s capital contribution at any given time is broadly the same as the definition of capital contribution which applies to all other LLP members, see BIM72620.

The main difference is that only amounts actually contributed on a winding-up count for non- active members. Limiting the winding up provision only to liabilities that actually arise and are met by the partner removed the possibility of exploitation by including theoretical liabilities in a future winding up which are unlikely to materialise in practice.

Non-active general partner’s capital contribution

The capital contribution of any other non-active partner (excluding limited partners and LLP members) at any given time is:

• 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 ‘trading profits’ or gains of the trade to which the partner is entitled but which they have not received in money or money’s worth. ‘Trading profits’ for this purpose means trading profits as computed in the accounts, not as adjusted for tax purposes.

Withdrawn capital

‘Withdrawn capital’ for this purpose has the same meaning as for LLP members, see BIM72625.

Financial cost of contributions not borne by partner

In excluding contributions because the financial cost of making them may not be borne by the partner personally, the rules which apply for non-active partners are the same as for limited partners and LLP members, see BIM72615 and BIM72625.

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.