BIM72601 - Partnerships: loss relief restrictions and exit charges: introduction

A number of anti-avoidance measures have been introduced to counter arrangements which seek to exploit relief for trading losses that individuals in partnerships may set against their other income or gains (commonly known as ‘sideways loss relief’).

Some arrangements involving partnerships allocated to particular partners losses that were greater than the financial contribution to the partnership that the partner was at risk of losing. Others created large losses initially which a partner could set against other income, but sought to avoid tax on later income flows by the partner leaving the partnership before the majority of the income arose.

These arrangements were particularly, but not exclusively, found in partnerships involved in the film industry where advantageous tax reliefs commonly create large losses for tax purposes in early years of trading.

Legislation introduced to counter these arrangements falls into two groups:

• restrictions on the extent to which certain partners can set their share of the partnership’s trading losses against their other income or gains,
• ‘exit charges’ imposed on certain partners who obtain a tax advantage by ‘exiting’ from partnerships carrying on certain trades, after they have claimed sideways loss relief for losses incurred in the trade.

Under SA taxpayers are responsible for limiting their claims to ‘sideways loss relief’, and for calculating any ‘exit charges’, in accordance with the relevant anti-avoidance legislation.

Loss relief restrictions - general

There are restrictions on the extent to which sideways loss relief may be claimed by:

• limited partners - these restrictions were introduced following the decision in the case of Reed v Young [1986] 59TC196 (ITA07/S104), see BIM72605,
• members of Limited Liability Partnerships (LLPs) – these restrictions were included in the LLP Act 2000 which enabled LLPs to be established in the UK (ITA07/S107), see BIM72605,
• non-active partners (including non-active LLP members) – these restrictions were introduced by FA04 and FA05 to counter avoidance schemes used mainly by partnerships in the film industry and apply to losses sustained in early years of trading (ITA07/S110), see BIM72605,
• partners in certain film partnerships where there is an agreement which guarantees the partner an amount of income – these restrictions were introduced by FA04 and apply to losses sustained in early years of trading (ITA07/S115), see BIM56565.

Loss relief restrictions – annual limit 2006/07 onwards

For losses sustained on or after 2 March 2007 there is also an annual limit of £25,000 on the amount of losses for a tax year for which sideways loss relief can be given to limited partners, non-active LLP members and non-active general partners, see BIM72611.

The £25,000 annual limit applies after other sideways loss relief restrictions outlined above have been applied.

The annual limit does not apply to trading losses derived from:

• qualifying film-related expenditure, see BIM72614
• a Lloyd’s underwriting business.

Exit charges

Amounts are charged to income tax on certain partners when they ‘exit’ from a partnership if they have previously claimed sideways loss relief in respect of:

• licence-related losses – mainly found in the film industry, where the trading losses are derived to any extent from expenditure incurred in exploiting a licence (ITA07/S804), see BIM56555 and BIM72685,
• film-related losses – where specific film reliefs legislation has been applied in computing the losses of the trade (ITA07/S796), see BIM56605.