BIM72675 - Computing the amount to assess: Partnerships - loss relief restrictions: Recovery of excess relief
Excessive sideways loss relief may have been given to a partner where, after the claim to relief has been made, an event occurs as a result of which an amount is excluded by the Regulations referred to at BIM72655 from counting as a relevant capital contribution by that partner.
ITA07/S791 provides for a charge to income tax on the partner concerned, effectively to recover excessive relief given, where:
- an affected partner has claimed sideways relief for a loss sustained after 1 December 2004, and
- after the claim is made an amount is excluded by the Regulations from being a relevant capital contribution (a “chargeable event”), and
- as a result of excluding that amount the total sideways loss reliefs given to the partner in respect of losses from the same trade exceed the partner’s (reduced) capital contribution.
The most likely trigger for a recovery charge is where the cost of making the partner’s capital contribution is borne by someone else, other than under an agreement or arrangement which existed when the contribution was first made.
If an agreement or arrangement exists when the contribution was first made, the contribution will be excluded from the outset and sideways loss relief restricted accordingly from the outset.
How excess relief is recovered
The excess relief is recovered by means of the partner concerned being chargeable to tax on an amount of income for the tax year in which the chargeable event occurred.
The chargeable amount is taxed as miscellaneous income (Schedule D Case VI for year 2004/05), not as income from the trade.
The amount chargeable is the smallest of:
- the amount by which the total sideways relief claimed by the partner for losses of the same trade (less any previously recovered relief) exceeds the partner’s (reduced) capital contributions after the chargeable event occurs,
- the amount by which the partner’s contribution to the trade is reduced as a result of the application of the Regulations,
- the total post 1 December 2004 losses claimed by the partner before the chargeable event occurred.
An example showing how to compute the chargeable amount is at BIM72680.
Losses sustained after 1 December 2004
Where a basis period straddles 1 December 2004 the losses sustained by the partner after 1 December 2004 are the losses from the period beginning with 2 December 2004 and ending with the end of the straddling basis period. These losses are arrived at by computing the losses of the partnership for this period, as if it were an accounting period of the partnership, and allocating those losses between the partners according to their interests in the partnership during that period.