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.