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Income Tax Act 2007 (c. 3)

(The document as of February, 2008)

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(1) This section applies if--

(a) an individual carries on a trade ("the relevant trade") as a member of an LLP at a time in a tax year, and

(b) the individual makes a loss in the relevant trade in the tax year ("the relevant tax year").

(2) But if the relevant tax year is an early tax year during which the individual carries on the relevant trade as a non-active partner (see section 112)--

(a) this section does not apply, and

(b) section 110 applies instead.

(3) There is a restriction on the amount of relief within subsection (4) which may be given to the individual for the loss.

(4) The relief within this subsection is--

(a) sideways relief against the individual's income apart from profits of the relevant trade, and

(b) capital gains relief.

(5) The restriction is that--

(a) the sum of the amount of the relief given and the total amount of all other relevant relief given, less

(b) the total amount of recovered relief,

must not exceed the individual's contribution to the LLP as at the end of the basis period for the relevant tax year (see section 108).

(6) "Relevant relief" means sideways relief or capital gains relief given to the individual for--

(a) a loss made in the relevant trade in a tax year at a time during which the individual carries on that trade as a member of an LLP, or

(b) a loss made in the relevant trade in an early tax year during which the individual carries on that trade as a non-active partner.

(7) "The total amount of recovered relief" means the total amount of income treated as received by the individual under section 792 (recovery of excess relief) as a result of the application of that section in relation to claims for relief for losses made by the individual in the relevant trade.

(8) If the LLP is carrying on, or has carried on, other trades apart from the relevant trade, for the purpose of determining the total amount of all other relevant relief and the total amount of recovered relief--

(a) apply subsection (6) in relation to each other trade as well as the relevant trade and then add the results together, and

(b) apply subsection (7) as if the reference to the relevant trade were a reference to the relevant trade or any of the other trades.

108 Meaning of "contribution to the LLP"

(1) For the purposes of section 107 the individual's contribution to the LLP at any time ("the relevant time") is the sum of amounts A and B.

(2) Amount A is the amount which the individual has contributed to the LLP as capital less so much of that amount (if any) as is within subsection (5).

(3) In particular, the individual's share of any profits of the LLP is to be included in the amount which the individual has contributed to the LLP as capital so far as that share has been added to the LLP's capital.

(4) In subsection (3) the reference to profits is to profits calculated in accordance with generally accepted accounting practice (before any adjustment required or authorised by law in calculating profits for income tax purposes).

(5) An amount of capital is within this subsection if it is an amount which--

(a) the individual has previously drawn out or received back,

(b) the individual draws out or receives back during the period of 5 years beginning with the relevant time,

(c) the individual is or may be entitled to draw out or receive back at any time when the individual is a member of the LLP, or

(d) the individual is or may be entitled to require another person to reimburse to the individual.

(6) In subsection (5) any reference to drawing out or receiving back an amount is to doing so directly or indirectly but does not include drawing out or receiving back an amount which, because of its being drawn out or received back, is chargeable to income tax as profits of a trade.

(7) Amount B is the amount of the individual's liability on a winding up of the LLP so far as that amount is not included in amount A.

(8) For the purposes of subsection (7) the amount of the individual's liability on a winding up of the LLP is the amount which--

(a) the individual is liable to contribute to the assets of the LLP in the event of its being wound up, and

(b) the individual remains liable to contribute for the period of at least 5 years beginning with the relevant time (or until the LLP is wound up, if that happens before the end of that period).

(9) This section needs to be read with any regulations made under section 114 (specified amounts to be excluded in calculating the individual's contribution to the LLP for the purposes of section 107).

109 Unrelieved losses brought forward

(1) This section applies for the purpose of determining an individual's entitlement to sideways relief and capital gains relief if--

(a) the individual carries on a trade as a member of an LLP at a time during a tax year ("the current tax year"), and

(b) as a result of section 107, sideways relief or capital gains relief has not been given to the individual for amounts of loss made in the trade in previous tax years as a member of the LLP.

(2) So far as they are not excluded by subsection (3), the amounts of loss mentioned in subsection (1)(b) are treated as having been made in the current tax year.

(3) An amount of loss is excluded so far as--

(a) as a result of this section, sideways relief or capital gains relief has been given to the individual for the amount for years prior to the current tax year or would have been so given had a claim been made, or

(b) other than as a result of this section, relief under the Income Tax Acts has been given to the individual for the amount for years prior to the current tax year or for the current tax year.



Non-active members of LLPs or other partnerships (apart from limited partnerships)

110 Restriction on reliefs for non-active partners in early tax years

(1) This section applies if--

(a) an individual carries on a trade ("the relevant trade") as a non-active partner in a firm during an early tax year (see section 112), and

(b) the individual makes a loss in the relevant trade in that tax year ("the relevant tax year").

(2) There is a restriction on the amount of relief within subsection (3) which may be given to the individual for the loss.

(3) The relief within this subsection is--

(a) sideways relief against the individual's income apart from profits of the relevant trade, and

(b) capital gains relief.

(4) The restriction is that--

(a) the sum of the amount of the relief given and the total amount of all other relevant relief given, less

(b) the total amount of recovered relief,

must not exceed the individual's contribution to the firm as at the end of the basis period for the relevant tax year (see section 111).

(5) "Relevant relief" means sideways relief or capital gains relief given to the individual for--

(a) a loss made in the relevant trade in a tax year at a time during which the individual carries on that trade as a limited partner or as a member of an LLP, or

(b) a loss made in the relevant trade in an early tax year during which the individual carries on that trade as a non-active partner.

(6) "The total amount of recovered relief" means the total amount of income treated as received by the individual under section 792 (recovery of excess relief) as a result of the application of that section in relation to claims for relief for losses made by the individual in the relevant trade.

(7) If the firm is carrying on, or has carried on, other trades apart from the relevant trade, for the purpose of determining the total amount of all other relevant relief and the total amount of recovered relief--

(a) apply subsection (5) in relation to each other trade as well as the relevant trade and then add the results together, and

(b) apply subsection (6) as if the reference to the relevant trade were a reference to the relevant trade or any of the other trades.

(8) In this section "trade" does not include a trade which consists of the underwriting business of a member of Lloyd's (within the meaning of section 184 of FA 1993).

111 Meaning of "contribution to the firm"

(1) For the purposes of section 110 the individual's contribution to the firm at any time ("the relevant time") is the sum of amount A and amount B and, if there is a winding up of the firm, amount C.

(2) Amount A is the amount which the individual has contributed to the firm as capital less so much of that amount (if any) as is within subsection (4).

(3) In particular, the individual's share of any profits of the firm is to be included in the amount which the individual has contributed to the firm as capital so far as that share has been added to the firm's capital.

(4) An amount of capital is within this subsection if it is an amount which--

(a) the individual has previously drawn out or received back,

(b) the individual draws out or receives back during the period of 5 years beginning with the relevant time,

(c) the individual is or may be entitled to draw out or receive back at any time when the individual is carrying on a trade as a partner in the firm, or

(d) the individual is or may be entitled to require another person to reimburse to the individual.

(5) In subsection (4) any reference to drawing out or receiving back an amount is to doing so directly or indirectly but does not include drawing out or receiving back an amount which, because of its being drawn out or received back, is chargeable to income tax as profits of a trade.

(6) Amount B is the amount of the individual's total share of profits within subsection (7) except so far as--

(a) that share has been added to the firm's capital, or

(b) the individual has received that share in money or money's worth.

(7) Profits are within this subsection if they are from the relevant trade.

(8) In determining the amount of the individual's total share of profits within subsection (7) ignore the individual's share of any losses from the relevant trade which would (apart from this subsection) reduce that amount.

(9) In subsections (3), (7) and (8) any reference to profits or losses are to profits or losses calculated in accordance with generally accepted accounting practice (before any adjustment required or authorised by law in calculating profits or losses for income tax purposes).

(10) If the firm is carrying on, or has carried on, other trades apart from the relevant trade, subsections (7) and (8) have effect as if references to the relevant trade were references to the relevant trade or any of the other trades.

Subsection (8) of section 110 applies for the purposes of this subsection as it applies for the purposes of that section.

(11) Amount C is the amount which the individual has contributed to the assets of the firm on its winding up so far as it is not included in amount A or B.

(12) This section needs to be read with any regulations made under section 114 (specified amounts to be excluded in calculating the individual's contribution to the firm for the purposes of section 110).

112 Meaning of "non-active partner" and "early tax year" etc

(1) For the purposes of this Chapter an individual carries on a trade as a non-active partner during a tax year if the individual--

(a) carries on the trade as a partner in a firm at a time during the year,

(b) does not carry on the trade as a limited partner at any time during the year, and

(c) does not devote a significant amount of time to the trade in the relevant period for the year.

(2) For the purposes of this Chapter an individual devotes a significant amount of time to a trade in the relevant period for a tax year if, in that period, the individual spends an average of at least 10 hours a week personally engaged in activities carried on for the purposes of the trade.

(3) For this purpose "the relevant period" means the basis period for the tax year (unless the basis period is shorter than 6 months).

(4) If the basis period for the tax year is shorter than 6 months, "the relevant period" means--

(a) the period of 6 months beginning with the date on which the individual first started to carry on the trade (if the basis period begins with that date), or

(b) the period of 6 months ending with the date on which the individual permanently ceased to carry on the trade (if the basis period ends with that date).

(5) If--

(a) any relief is given on the assumption that the individual devoted or will devote a significant amount of time to the trade in the relevant period for a tax year, but

(b) the individual in fact failed or fails to do so,

the relief is withdrawn by the making of an assessment to income tax under this section.

(6) In this Chapter "early tax year" means, in relation to an individual carrying on a trade--

(a) the tax year in which the individual first started to carry on the trade, or

(b) one of the next 3 tax years.

113 Unrelieved losses brought forward

(1) This section applies for the purpose of determining an individual's entitlement to sideways relief and capital gains relief in relation to a trade if--

(a) at a time during a tax year ("the current tax year") the individual carries on the trade as a partner in a firm or makes a contribution to the assets of a firm within subsection (2) on the firm's winding up, and

(b) as a result of section 110, sideways relief or capital gains relief has not been given to the individual for amounts of loss made in the trade in previous tax years.

(2) A firm is within this subsection if the individual has carried on the trade as a partner in the firm.

(3) So far as they are not excluded by subsection (4), the amounts of loss mentioned in subsection (1)(b) are treated as having been made in the current tax year.

(4) An amount of loss is excluded so far as--

(a) as a result of this section, sideways relief or capital gains relief has been given to the individual for the amount for years prior to the current tax year or would have been so given had a claim been made, or

(b) other than as a result of this section, relief under the Income Tax Acts has been given to the individual for the amount for years prior to the current tax year or for the current tax year.

(5) For the purpose of applying sections 107 and 110 in relation to the amounts of loss treated by this section as having been made in the current tax year--

(a) the individual is treated as having carried on the trade during the current tax year as a non-active partner in the firm, and

(b) the current tax year is treated as if it were an early tax year in relation to the individual's carrying on of the trade.

(6) Subsection (7) applies if the individual--

(a) made a contribution in the current tax year to the assets of the firm on its winding up, but

(b) did not carry on the trade as a partner in the firm in the current tax year.

(7) If this subsection applies--

(a) the restrictions under sections 66 and 74(1) do not apply in relation to the amounts of loss treated by this section as having been made in the current tax year, and

(b) in the application of this Chapter in relation to those amounts of loss, section 110(4) has effect as if the words "the basis period for" were omitted.

(8) In subsection (1)(b) the reference to amounts of loss does not include amounts of loss which have been treated by section 109 as having been made in any previous tax year.



Regulations

114 Exclusion of amounts in calculating contribution to the firm or LLP

(1) The Commissioners for Her Majesty's Revenue and Customs may by regulations provide that any amount of a specified description is to be excluded in calculating--

(a) the individual's contribution to the firm for the purposes of section 104 or 110, or

(b) the individual's contribution to the LLP for the purposes of section 107.

(2) "Specified" means specified in the regulations.

(3) The regulations may--

(a) make provision having retrospective effect,

(b) contain incidental, supplemental, consequential and transitional provision and savings, and

(c) make different provision for different cases or purposes.

(4) The provision which may be made as a result of subsection (3)(b) includes provision amending or repealing any provision of an Act passed before FA 2005.

(5) No regulations may be made under this section unless a draft of them has been laid before and approved by a resolution of the House of Commons.



Restrictions for film trades carried on in partnership

115 Restrictions on reliefs for firms exploiting films

(1) This section applies if--

(a) an individual carries on a trade as a partner in a firm at a time during a tax year,

(b) the trade consists of or includes the exploitation of films,

(c) the individual makes a loss in the trade in the tax year ("the affected tax year"),

(d) the individual does not devote a significant amount of time to the trade in the relevant period for the affected tax year (see section 112),

(e) the affected tax year is the one in which the individual first started to carry on the trade or is one of the next 3 tax years, and

(f) a relevant agreement existed at a time during the affected tax year which guaranteed the individual an amount of income (see subsections (5) to (9)).

(2) Sideways relief for the loss is not available to the individual, except against any of the individual's income which consists of profits of the trade.

(3) Capital gains relief for the loss is not available to the individual.

(4) But see section 116 (exclusion from restrictions for certain film expenditure).

(5) An agreement is relevant if--

(a) it is an agreement made with a view to the individual's carrying on the trade,

(b) it is an agreement made in the course of the individual's carrying it on, or

(c) it is related to an agreement falling within paragraph (a) or (b).

(6) An agreement is relevant whether or not the individual is or may be required under the agreement to contribute an amount to the trade.

(7) Agreements are related to one another if they are entered into under the same arrangement (regardless of when either agreement is entered into).

(8) A relevant agreement guarantees the individual an amount of income if it (or any part of it) is designed to secure the receipt by the individual of that amount (or at least that amount) of income.

(9) It does not matter when the amount of income is (or is to be) received.

(10) In this section "film" is to be read in accordance with paragraph 1 of Schedule 1 to the Films Act 1985 (c. 21).

116 Exclusion from restrictions under section 115: certain film expenditure

(1) The restrictions under section 115 do not apply to so much of the loss (if any) as derives from unrestricted film expenditure.

(2) Expenditure is unrestricted film expenditure if--

(a) it is deducted under a relevant film provision for the purposes of the calculation required by section 849 of ITTOIA 2005 (calculation of firm's profits or losses), or

(b) it is incidental expenditure which (although not deducted under a relevant film provision) is incurred in connection with the production of a film, or the acquisition of the original master version of a film, in relation to which expenditure is so deducted.

(3) Expenditure is incidental if it is on management, administration or obtaining finance.

(4) The following are determined on a just and reasonable basis--

(a) the amount of the loss that derives from unrestricted film expenditure, and

(b) the extent to which expenditure is within subsection (2)(b).

(5) In this section--

  • "the acquisition of the original master version of a film" has the same meaning as in Chapter 9 of Part 2 of ITTOIA 2005 (see sections 130 and 132 of that Act),

  • "film" is to be read in accordance with paragraph 1 of Schedule 1 to the Films Act 1985, and

  • "a relevant film provision" means any one of sections 137 to 140 of ITTOIA 2005 (relief for certified master versions of films).



Chapter 4 Losses from property businesses

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Introduction

117 Overview of Chapter

(1) This Chapter--

(a) provides for losses made in a UK property business or overseas property business in a tax year to be carried forward for deduction from profits in subsequent tax years (see sections 118 and 119),

(b) provides in limited circumstances for relief against general income for losses made in a UK property business or overseas property business (see sections 120 to 124), and

(c) provides for relief for certain post-cessation payments and events in connection with a UK property business (see section 125).

(2) This Chapter also makes provision for a UK property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation to be treated as a trade for the purposes of this Part (see section 127).



Carry-forward property loss relief

118 Carry forward against subsequent property business profits

(1) Relief is given to a person under this section if the person--

(a) carries on a UK property business or overseas property business (alone or in partnership) in a tax year, and

(b) makes a loss in the business in the tax year.

(2) The relief is given by deducting the loss in calculating the person's net income for subsequent tax years (see Step 2 of the calculation in section 23).

(3) But a deduction for that purpose is to be made only from profits of the business.

(4) In calculating a person's net income for a tax year, deductions under this section from the profits of a business are to be made before deductions of any other reliefs from those profits.

(5) No relief is to be given under this section so far as relief for the loss is given under section 120.

(6) This section needs to be read with section 119 (how relief works).

119 How relief works

This section explains how the deductions are to be made.

The amount of the loss to be deducted at any step is limited in accordance with section 25(4) and (5).

Step 1

Deduct the loss from the profits of the business for the next tax year.

Step 2

Deduct from the profits of the business for the following tax year the amount of the loss not previously deducted.

Step 3

Continue to apply Step 2 in relation to the profits of the business for subsequent tax years until all the loss is deducted.



Property loss relief against general income

120 Deduction of property losses from general income

(1) A person may make a claim for property loss relief against general income if--

(a) in a tax year ("the loss-making year") the person makes a loss in a UK property business or overseas property business (whether carried on alone or in partnership), and

(b) the loss has a capital allowances connection or the business has a relevant agricultural connection.

(2) The claim is for the applicable amount of the loss to be deducted in calculating the person's net income--

(a) for the loss-making year, or

(b) for the next tax year.

(See Step 2 of the calculation in section 23.)

(3) The claim must specify the tax year for which the deduction is to be made.

(4) But if the applicable amount of the loss is not deducted in full in giving effect to a claim for the specified tax year, the person may make a separate claim for property loss relief against general income for the other tax year.

(5) For this purpose "the other tax year" means the tax year which was not specified in the claim already made, but which could have been specified.

(6) This section needs to be read with--

(a) section 121 (how relief works),

(b) section 122 (meaning of "the applicable amount of the loss"),

(c) section 123 (meaning of "the loss has a capital allowances connection" and "the business has a relevant agricultural connection"), and

(d) section 124 (supplementary).

121 How relief works

(1) This subsection explains how the deductions are to be made.

The amount of the applicable amount of the loss to be deducted at any step is limited in accordance with section 25(4) and (5).

Step 1

Deduct the applicable amount of the loss in calculating the person's net income for the specified tax year.

Step 2

This step applies if the applicable amount of the loss has not been deducted in full and the person makes a separate claim for the other tax year.

Deduct the part of the applicable amount of the loss not deducted at Step 1 in calculating the person's net income for the other tax year.

Other relief

If the applicable amount of the loss has not been deducted in full at Steps 1 and 2, relief is given under section 118 for the part not so deducted.

(2) There is a priority rule if--

(a) a person makes a claim for property loss relief against general income ("the prior claim") in respect of a loss made in a tax year,

(b) the prior claim specifies the next tax year as the one for which the deduction is to be made ("the relevant tax year"),

(c) the person makes another claim for property loss relief against general income in respect of a loss made in the relevant tax year, and

(d) that other claim also specifies the relevant tax year as the one for which the deduction is to be made.

(3) The rule is that priority is given to making deductions under the prior claim.

122 Meaning of "the applicable amount of the loss"

(1) This section defines "the applicable amount of the loss" for the purposes of sections 120 and 121.

(2) "The applicable amount of the loss" is--

(a) the amount of the loss, or

(b) if less, the amount arising from the relevant connection (see subsections (3) to (5)).

(3) If--

(a) the loss has a capital allowances connection, but

(b) the business does not have a relevant agricultural connection,

the amount arising from the relevant connection is the amount ("the net capital allowances") by which the capital allowances exceed the charges under CAA 2001.

(4) If--

(a) the business has a relevant agricultural connection, but

(b) the loss does not have a capital allowances connection,

the amount arising from the relevant connection is the amount of the allowable agricultural expenses.

(5) If--

(a) the loss has a capital allowances connection, and

(b) the business has a relevant agricultural connection,

the amount arising from the relevant connection is the sum of the net capital allowances and the amount of the allowable agricultural expenses.

123 Meaning of "the loss has a capital allowances connection" and "the business has a relevant agricultural connection"

(1) This section applies for the purposes of sections 120 and 122.

(2) The loss has a capital allowances connection if, in calculating the loss--

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