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Restriction of loss relief proposed
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Where Taxpayers and Advisers Meet
Restriction of loss relief proposed
02/03/2007, by Sarah Laing, Tax News - Business Tax
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The Government has announced details of proposals to restrict loss relief currently available to individuals who carry on a trade in partnership.

ICTA 1988, ss 380 and 381 and FA 1991, s 72 allow trading losses arising to an individual to be set against other income and capital gains. These reliefs may be claimed by individuals who carry on a trade in partnership - generally referred to as “sideways loss reliefs”.

Currently, the amount of trading losses for a tax year for which a non-active partner can claim sideways loss relief is restricted broadly to the amount of capital that the partner has contributed to the partnership (ICTA 1988, ss 117, 118ZB and 118ZE). However, the Government is proposing to introduce new legislation to exclude certain capital contributions from this amount.

The capital contributions to be excluded will be those paid by non-active partners on or after 2 March 2007 where the main purpose, or one of the main purposes, for contributing the capital to the partnership is for the partner to have access to losses for which sideways loss relief can be claimed.

The Government is also proposing the introduction of an annual limit on the amount of trading losses for a tax year for which an individual who is a non-active partner in a partnership can claim sideways loss reliefs. The new limit will apply to trading losses sustained as a non-active partner on or after 2 March 2007.

The limit for each tax year, for trading losses from all partnerships in which the individual was a non-active partner for that year, will be the lower of:

  • £25,000; or
  • the amount of trading losses for the tax year for which the individual would otherwise be able to claim sideways loss reliefs.

A non-active partner for these purposes will be a limited partner or any other partner who spends an average of less than 10 hours a week personally engaged in carrying on the partnership’s trading activities.

A trading loss for which sideways loss relief is not available can be carried forward and set against the individual’s share of the partnership’s trading profits for future tax years.

The new limit will not apply to losses from carrying on a profession or a Lloyd’s underwriting business.

Limited liability partnerships and members of LLPs are equally affected by these proposals.

For tax year 2007-08 and later years the provisions in ICTA 1988 and FA 1991 referred to above are rewritten by the Income Tax Act (ITA) 2007.


HMRC Brief 18/07: Tackling Avoidance - Individuals in partnership - restriction of loss relief

About The Author

Sarah Laing
Editor, TaxationWeb News

Sarah is a Chartered Tax Adviser. She has been writing professionally since joining CCH Editions in 1998 as a Senior Technical Editor, contributing to a range of highly regarded publications including the British Tax Reporter, Taxes - The Weekly Tax News, the Red & Green legislation volumes, Hardman's, International Tax Agreements and many others. She became Publishing Manager for the tax and accounting portfolio in 2001 and later went on to help run CCH Seminars (including ABG Courses and Conferences).

Sarah originally worked for the Inland Revenue in Newbury and Swindon Tax Offices, before moving out into practice in 1991. She has worked for both small and Big 5 firms. She now works as a freelance author providing technical writing services for the tax and accountancy profession.

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