Partnership losses

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Partnership losses
  • Introduction
  • Notional losses
  • Losses incurred in continuing trades
  • Early trade losses relief
  • Losses in year of cessation
  • Non-active partners
  • Limited partners
  • Members of limited liability partnerships
  • Mixed partnerships
  • Cap on unlimited income tax reliefs

Introduction

Partnership trading losses are computed in the same way as profits. Once the partnership loss has been computed it is allocated between the partners in accordance with the profit-sharing ratios for that accounting period.

ITTOIA 2005, ss 849, 850

If the partnership makes a loss, once the loss has been allocated, each partner is then able to claim loss relief based on his own personal circumstances. There is no concept of a ‘partnership loss’ ― the loss belongs to the partners and loss relief claims are made individually.

As there are several options for relieving losses, careful planning is required to achieve the optimum position. A balance may be needed between relieving losses early (and so generating cash sooner) and relieving losses at the highest possible tax rates.

See the Checklist ― trading loss relief.

HMRC has published a toolkit entitled ‘Income tax losses’ , which aims to help reduce errors on Tax Returns. Use of HMRC’s toolkits should be proof of reasonable care.

Some of the reliefs for partnership losses are included in the cap on unlimited income tax reliefs (see below).

Notional losses

Before discussing methods of obtaining relief for trading losses, it is important to discuss the concept of notional losses.

In some cases, profit allocations may create a loss for a partner in a year when the partnership as a whole made a profit. This could arise where the partners have agreed high salaries, but in a particular year profits may be low. Where salaries exceed profits, losses will be created within the partnership. These losses are known as ‘notional losses’ (ie no loss exists in real terms but one has been artificially created because of the way salaries have been allocated).

It is not possible for a partner to sustain a loss when the partnership overall

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