PM131520 - LLP: restriction of relief for LLP members

The legislation for the restrictions on reliefs for LLP members can be found from S107-S111 Income Tax Act 2007 and S59-S61 Corporation Tax Act 2010.

A member of a LLP is entitled to the same relief for the share of the LLP’s trading or professional losses allocated to them in the same way as a partner in a general partnership.

In certain circumstances the amount of sideways loss relief which a member of a LLP that carries on a trade might otherwise be entitled to is restricted. These restrictions only apply to a LLP that carries on a trade. They do not apply to a LLP that carries on either a profession or an investment business that does not amount to a trade. See s107 ITA 2007 and s59CTA 2010.

No restriction of relief against same trade

The legislation restricts relief against other income from other sources. It does not restrict relief against income derived from the same trade, whether of earlier or later years. Where relief for a trading loss is given against the general income of another chargeable period, which includes both trading income and non-trading income, relief is deemed to be given first against trading income from the same trade. See s109 &113 ITA2007 and s61 CTA 2010.

Reliefs restricted: individuals

In the case of individual LLP members, the reliefs which are subject to restriction are:

  • relief for trading losses against the partner’s general income (see BIM85015) or capital gains (see BIM85025) of the same or preceding year;

  • relief for trading losses sustained in the first tax year in which the claimant carries on the trade, or in any of the next three tax years, against their general income of the preceding three years (see BIM85045).These loss reliefs are commonly known as ‘sideways loss relief’. Detailed guidance on how to compute sideways loss relief restrictions for individual limited partners is at PM194000 onwards.

    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 a non-active LLP member (s110 ITA2007); see PM193000.

Reliefs restricted: companies

In the case of a corporate LLP member the reliefs, which are subject to restriction, are:

  • relief for losses against the total profits of the same or preceding accounting period (see CTM04500 onwards),
  • group relief (see CTM80100 onwards).

Calculation of limit of relief: corporate partners

An important limit, is that the relief against other income must never exceed the contribution to the LLP. The restriction for corporate LLP members is similar to that for corporate limited partners (see PM131320). A comparison has to be made, at the end of the company’s own accounting period, between:

  • the total amount of relief already allowed together with the relief sought for the accounting period in question (or for the part of that period up to cessation of the limited partnership trade, if earlier), and
  • the company’s contribution to the LLP at the end of the loss-making accounting period (or, if the company ceases to carry on the trade during the period, at the time it does so).

The reliefs to be brought into account in making that comparison are those listed above.

A member’s contribution to the LLP at any time (‘the relevant time’) is the sum of:

  • the amount which the company has contributed to the LLP as capital less the amounts in 1-4 below, and
  • the amount of the member’s liability on a winding up (so far as not included in (a) above).

The amounts to be deducted from the amount contributed as capital are any amounts that the company:

  • has previously directly or indirectly drawn out or received back,
  • draws out or receives back during the period of five years beginning with the ‘relevant time’,
  • is or may be entitled so to draw out or receive back at any time when it is a member of the LLP, or
  • is or may be entitled to require another person to reimburse to it.

The amount of a company’s liability on a winding up is the amount which it:

  • is liable to contribute to the assets of the LLP in the event of its being wound up, and
  • remains liable so to contribute for the period of at least five years beginning with the relevant time (or until it is wound up if that happens to end before the end of that period).

The undrawn profits of a member of a LLP cannot normally be added to their subscribed capital. This is because, subject to any agreement between them, a member’s undrawn profit is normally regarded as a debt of the LLP to the member. This means that the member ranks, for that sum, alongside the other creditors in the event of liquidation. If however the terms of the agreement between the members specifically provide that the undrawn profit stands as part of a member’s capital contribution and that agreement is unconditional then that amount is added to the capital contribution in (a) above.

Where a member of a LLP makes a capital contribution to a partnership in order to meet a liability for negligence for which they are personally responsible then that amount is to be taken into account in determining the amount of their capital contribution to the partnership for these purposes. That partner is entitled, provided the conditions for the relief are otherwise met, to relief up to a maximum of the amount of their additional contribution under the normal sideways loss relief provisions.

Further capital contributions

A member of a LLP, whether a company or an individual, who has had their loss relief restricted to their capital contribution in an earlier chargeable period, may obtain relief on making a further capital contribution in a later chargeable period.

Where a member of a LLP is prevented from obtaining relief for their share of the LLP’s trading loss sustained in an earlier chargeable period, because the amount of that relief was restricted to their contribution at that time, then the member may be entitled to relief for the balance of that loss (the unrelieved loss) in a subsequent chargeable period in which they make a further ‘contribution’ to the LLP provided that at the time the further contribution is made they are a member of the LLP.

If these rules are satisfied then the unrelieved loss is treated as having been made by the member in the subsequent accounting period and so is eligible for sideways relief or surrender as group relief. In order to arrive at the amount of the unrelieved loss in the subsequent period the following are deducted:

  • amounts in respect of which relief has been given under any other provisions of the Tax Acts in this or an earlier chargeable period, and
  • amounts in respect of which relief has been given or allowed under these provisions for an earlier chargeable period (or relief which would have been given or allowed had a claim been made).

The amount of the additional relief given in respect of the ‘unrelieved loss’ for a particular chargeable period is restricted to the capital contribution made in that period. If there still remains a balance of ‘unrelieved loss’ further relief may be due for a later chargeable period if a further capital contribution is made in that later period.