Partnership losses – the impact of the new rules

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The new rules on partnership losses may have been designed to stop avoidance schemes but many “innocent” businesses may also be caught.

The changes are wide-ranging and could affect transactions where no actual tax avoidance is involved. Of particular concern is the limit of £25,000.00 per year on the availability of relief on losses from trading partnerships for “non-active partners”.

The changes apply to conventional partnerships, Limited Liability Partnerships and Limited Partnerships.

The key issue is what is a “non-active partner”? Basically a partner who spends an average of less than ten hours a week personally engaged in carrying out the partnership’s trading activities is regarded as non-active.

The loss retention is actually capped at £25,000.00 per year regardless of how many partnerships you are in .

Any excess losses over £25,000.00 are carried forward to be allowed against future trading income from the trade in which the loss arose.

The rules are likely to affect husband/wife and civil partner partnerships where one member is actively involved and the other works elsewhere. Similarly it will affect entrepreneur investors and, potentially, retiring partners who have scaled back their hours.

It is important to remember that the issue is hopefully one of timing -losses will not disappear, they will be available as and when (or if ) the business makes a profit.

If you are involved in partnerships on a part-time basis, you may need to review your position if there is a bad year to make sure relief is claimed correctly.

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