Owner-Managed Businesses

Relief for partnership losses

Produced by Tolley
  • 19 Oct 2021 08:15

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Relief for partnership losses
  • Calculation of partnership losses
  • What loss reliefs are available?
  • When can loss relief be claimed?
  • Relief against income of the year of loss or preceding year
  • Set off of trading losses against capital gains
  • Carry forward of trading losses
  • Loss relief planning
  • Loss relief claims

Relief for partnership losses

Calculation of partnership losses

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.

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

For partnerships continuing in business, and partners continuing in partnership year after year, losses are relieved in accordance with the relevant income or corporation tax loss relief rules (depending on whether the partner is a corporate partner or not).

What loss reliefs are available?

Broadly, losses allocated to the relevant partners may be relieved against the following:

  1. net income (total income for corporate partners) of the year of loss or the preceding year, with a temporary extension to three years for 2020/21 and 2021/22

  2. current year capital gains (for individual partners), to the extent that losses cannot be relieved against current or prior year net income, and

  3. future profits

ITA 2007, ss 64, 71, 83; CTA 2010, s 37

These are dealt with in more detail below.

For individual partners (as opposed to corporate partners), there are further complications. In particular, it is important to remember the cap on unlimited income tax reliefs; see the Cap on unlimited income tax reliefs. This cap restricts relief for trading losses (and property losses), where these are used against general income and the taxpayer claims more than £50,000 in reliefs in any one year.

Also, special rules apply for individual partners in the opening or closing years of a business ― see the New partners’ losses and Retiring partners and cessation of partnership guidance notes.

As there are several options for relieving losses, careful planning is required to achieve the optimum position. A balance

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