BIM72680 - Partnerships: loss relief restrictions: recovery of excess relief: example

Partner A is a member of an LLP which carries on a trade and makes it accounts up to 31 March each year.

Capital contributions

On 1 April 2005 Partner A contributes capital of £100,000 to the LLP. This is financed by £20,000 of A’s own money and £80,000 which A borrows from a bank on full recourse terms.

On 1 April 2006 Partner A withdraws £10,000 capital from the LLP.

On 1 April 2007 the bank assigns Partner A’s loan to another lender who, as part of arrangements entered into with A at that time, agrees to not to require repayment of the loan of £80,000. This is a chargeable event which may trigger recovery of excess loss relief already given.

Sideways loss relief claimed

Partner A has claimed the following sideways loss reliefs for his share of the LLP’s losses:

Year ended 31 March 2006: £80,000.

Excess relief

As a result of the chargeable event on 1 April 2007 Partner A’s relevant capital contribution is reduced to £10,000 (£100,000 less £10,000 less £80,000).

The recovery income tax charge on Partner A for 2006/07 is £70,000, which is the smallest of:

• total sideways relief claimed (£80,000) less reduced capital contribution as at 1 April 2007 (£10,000) = £70,000,
• amount by which capital contribution is reduced by the Regulations = £80,000,
• total post 1 December 2004 losses for which sideways loss relief claimed = £80,000.

Partner A should include this amount as taxable ‘miscellaneous income’ on their SA tax return for 2006/07.