Clause 103: Meaning of "sideways relief", "capital gains relief" and "firm"

339.     This clause defines these terms. It is new.

340.     The definition of "capital gains relief" refers to section 261B of TCGA, which is inserted by Schedule 1 to this Bill.

Clause 104: Restriction on reliefs for limited partners

341.     This clause restricts the use of a trade loss made in a tax year by an individual carrying on the trade as a limited partner. It is based on section 117(1) and (2) of ICTA.

342.     Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual's "contribution to the firm".

343.     The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit. See Change 13 in Annex 1.

344.     The individual's contribution to the firm is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

345.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on this Chapter and Change 16 in Annex 1.

Clause 105: Meaning of "contribution to the firm"

346.     This clause sets out details of what is included in determining the contribution to the firm. It is based on section 117(3) and (5) of ICTA.

347.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary to this Chapter and Change 16 in Annex 1.

348.     The individual's contribution of capital to the firm is reduced by any amounts drawn out or received back. Subsection (5) provides an exception. The exception is for an amount drawn out or received back which is treated as income chargeable to income tax. This exception is similar to the one in clause 111(5), based on section 118ZG(5) of ICTA. See Change 17 in Annex 1.

Clause 106: Meaning of "limited partner"

349.     This clause defines "limited partner". It is based on section 117(2) of ICTA.

350.     A limited partner of a limited partnership registered under the Limited Partnerships Act 1907 is someone who is not entitled to take part in the management of the firm's business and is not liable for the debts or obligations of the firm beyond a certain limit. And a limited partner of any other firm is someone who is similarly not entitled to take part in management and not liable for debts or obligations in accordance with the rules applying to the firm in question.

351.      Subsection (4) is introduced as part of drafting in terms of an individual's "contribution to the firm" in place of "contribution to the trade". See Change 16 in Annex 1.

Clause 107: Restriction on reliefs for members of LLPs

352.     This clause restricts the use of a trade loss made in a tax year by an individual carrying on a trade as a member of a limited liability partnership (LLP). It is based on sections 117(1) and (2) and 118ZB(1) and (2) of ICTA.

353.     Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual's "contribution to the LLP".

354.      The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit. See Change 13 in Annex 1.

355.     The individual's contribution to the LLP is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

356.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on this Chapter and Change 16 in Annex 1.

Clause 108: Meaning of "contribution to the LLP"

357.     This clause sets out details of what is included in determining the contribution to the LLP. It is based on sections 118ZB(1) and 118ZC of ICTA.

358.     An LLP formed under the Limited Liability Partnerships Act 2000 is an entity with separate legal personality. That Act, defines what is meant by contribution to the limited liability partnership.

359.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on this Chapter and Change 16 in Annex 1.

360.     The individual's contribution of capital to the LLP is reduced by any amounts drawn out or received back. Subsection (6) provides an exception. The exception is for an amount drawn out or received back which is treated as income chargeable to income tax. This exception is similar to the one in clause 111(5), based on section 118ZG(5) of ICTA. See Change 17 in Annex 1.

Clause 109: Unrelieved losses brought forward

361.     This clause specifies how the amount of any loss, which could not be relieved because of clause 107, may be brought forward for use in a later tax year in which the individual continues to carry on the trade as a member of an LLP. It is based on sections 118ZD and 118ZM(8) of ICTA.

362.     The clause treats the unrelieved loss as a trading loss of the later tax year, unless it is an excluded loss (see subsection (3)).

363.     The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit in clause 107, to which this clause refers. See Change 13 in Annex 1.

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

364.     This clause restricts the use of trade losses made by an individual carrying on a trade as "a non-active partner" in an "early tax year". It is based on sections 118ZE and 118ZF of ICTA.

365.     A non-active partner is an individual who does not devote a significant amount of time to the trade and is not a limited partner. See clause 112.

366.     Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual's "contribution to the firm".

367.     The restriction applies only to losses made in the first tax year in which the individual carries on the trade or in any of the next three tax years. See clause 112(6).

368.     The interaction between section 72 of FA 1991 and section 118ZE of ICTA is made explicit. See Change 13 in Annex 1.

369.     The individual's contribution to the firm is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

370.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on this Chapter and Change 16 in Annex 1.

371.     Subsection (8) disapplies the rules in the case of losses from a trade of underwriting at Lloyd's. Lloyd's underwriters are subject to a specific tax regime which reflects the nature of the business and the partners' liabilities for the underwriting losses.

Clause 111: Meaning of "contribution to the firm"

372.     This clause sets out details of what is included in determining the individual's contribution to the firm. It is based on section 118ZG of ICTA.

373.     There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on this Chapter and Change 16 in Annex 1.

374.     The definition differs slightly from the definition of "contribution to the firm" for limited partners. The definition for a non-active partner includes a reference to any additional amount contributed on a winding-up, whereas the definition for a limited partner includes no such reference, as a limited partner is under no obligation to contribute any amounts beyond the amount originally agreed as the required contribution.

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

375.     This clause sets out details of who is carrying on a trade as a non-active partner in an early tax year. It is based on sections 118ZE, 118ZH and 118ZM of ICTA.

376.     The definition excludes limited partners. So only a "general" partner (that is, a partner other than a limited partner) or a member of an LLP may be a non-active partner.

377.     In broad terms, a non-active partner is an individual who does not devote a significant amount of time to the trade and is, therefore, unlikely to be anything more than a financial investor.

378.     Subsection (2) provides that a significant amount of time is taken as being a minimum of ten hours per week, on average taken across the period.

379.     Subsections (3) and (4) define the "relevant period" for the purposes of subsection (2) as the whole of the basis period for the tax year, or a continuous period of at least six months either beginning with the date of commencement or ending with the date of cessation. For example, if an individual commences a trade on 1 April 2007, the basis period for 2006-07 is 1 April 2007 to 5 April 2007. And the relevant period ends on 30 September 2007 for the purposes of this clause in relation to the tax year 2006-07. So the individual must meet the "significant amount of time" test for six months rather than just for five days.

380.     Subsection (5) provides that where relief is given but the "activity" rules prove not to be satisfied, relief is withdrawn by making an assessment under this clause.

Clause 113: Unrelieved losses brought forward

381.     This clause specifies how the amount of any loss, which could not be relieved because of clause 110, may be brought forward for use in a later tax year in which the individual continues to carry on the trade as a partner (or contributes to the firm on its winding up). It is based on sections 118ZI and 118ZM of ICTA.

382.     The clause treats the unrelieved loss as a trading loss of the later tax year unless it is an excluded loss (see subsection (4)).

383.     The interaction between section 72 of FA 1991 and section 118ZE of ICTA is made explicit in clause 110, to which this clause refers. See Change 13 in Annex 1.

384.     The clause reflects the contribution to the firm being measured at the end of the basis period for a tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

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

385.     This clause enables regulations, which can apply on a retrospective basis, to exclude certain amounts from the calculation of the contribution to the firm or LLP. It is based on section 118ZN of ICTA.

386.     Regulations made under this clause are subject to the affirmative resolution procedure.

387.      There is a change from "contribution to the trade" in the source legislation to "contribution to the firm". See the overview commentary on this Chapter and Change 16 in Annex 1.

388.     Some regulations have been made under section 118ZN of ICTA, with effect from 22 July 2005. See the Partnerships (Restrictions on Contributions to a Trade) Regulations 2005 (SI 2005/2017). See also the commentary on Part 5 of Schedule 2 about consequential amendments made to these regulations by this Bill.

389.     In subsection (4), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See clause 952 and Change 145 in Annex 1.

Clause 115: Restrictions on reliefs for firms exploiting films

390.     This clause extends the restriction on the use of sideways relief and capital gains relief to (effectively) non-active partners carrying on a trade that exploits films, where there is a relevant agreement that guarantees the individual an amount of income. It is based on sections 118ZL and 118ZM of ICTA.

391.     The interaction between section 72 of FA 1991 and section 118ZL of ICTA is made explicit. See Change 13 in Annex 1.

Clause 116: Exclusion from restrictions under section 115: certain film expenditure

392.     This clause specifies that the restriction under the previous clause does not apply to the extent any loss qualifying for relief derives from unrestricted film expenditure. It is based on sections 118ZL and 118ZM of ICTA.

Chapter 4: Losses from property businesses

Overview

393.     This Chapter provides relief for losses from property businesses.

Clause 117: Overview of Chapter

394.     This clause provides an overview of the Chapter. It is new.

395.     Subsection (1) lists the types of relief available for property losses and refers to the various sections where the details of the reliefs and associated miscellaneous provisions can be found.

396.     Subsection (2) highlights the fact that a UK property business, so far as it consists of the commercial letting of furnished holiday accommodation, is treated as a trade for loss relief purposes.

Clause 118: Carry forward against subsequent property business profits

397.     This clause provides relief for property losses against property business income of later years. It is based on sections 379A and 379B of ICTA.

398.     Section 272 of ITTOIA specifies that the same rules apply in calculating profits and losses of a property business as apply for calculating profits and losses of a trade. So rewriting section 379A(7) of ICTA is unnecessary. See the reference to section 272 of ITTOIA in clause 59.

Clause 119: How relief works

399.     This clause explains how the deductions are made. It is based on sections 379A(1) and 379B of ICTA.

Clause 120: Deduction of property losses from general income

400.     This clause provides relief for property losses against general income, if the loss has a capital allowances or relevant agricultural connection. It is based on sections 379A and 379B of ICTA.

Clause 121: How relief works

401.     This clause explains how the deductions are made. It is based on sections 379A and 379 B of ICTA.

Clause 122: Meaning of "the applicable amount of the loss"

402.     This clause defines "the applicable amount of the loss", with the effect that a claim by a person for property loss relief against general income is restricted to the lesser of the loss itself and the amount arising from the relevant connection. It is based on sections 379A(4) and 379B of ICTA.

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

403.     This clause defines the meaning of "the loss has a capital allowances connection" and "the business has a relevant agricultural connection". It is based on section 379A and 379B.

Clause 124: Supplementary

404.     This clause provides the time limit for making a claim under clause 120 and supplementary matters if a claim is made. It is based on sections 379A(3) and 379B of ICTA.

Clause 125: Post-cessation property relief

405.     This clause provides relief for payments of certain expenses etc after a property business has ceased (and for which relief would not otherwise be available). It is based on section 109A and section 110 of ICTA.

406.     A claim for post-cessation property relief is possible if a person ceases carrying on a UK property business and within seven years makes a qualifying payment (see clause 97) or a qualifying event occurs in relation to a debt of the business (see clause 98).

Clause 126: Treating excess post-cessation property relief as CGT loss

407.     This clause is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of post-cessation property relief. It is new.

Clause 127: UK furnished holiday lettings business treated as trade

408.     This clause provides, subject to modifications, the same range of reliefs for a loss from a UK furnished holiday lettings business as is available for a trade loss. It is based on section 504A of ICTA.

409.     Subsection (4) applies Chapter 2 (trade losses) with the omission of the clause restricting the availability of trade leasing allowances, as an individual letting furnished holiday accommodation cannot lease out equipment as part of that business.

410.     Subsections (5) and (6) deny early trade loss relief to an individual in respect of a tax year if any of the accommodation was first let by the individual as furnished accommodation more than three years before the start of the tax year.

Chapter 5: Losses in an employment or office

Overview

411.     This Chapter provides relief for losses in an employment or office.

Clause 128: Employment loss relief against general income

412.     This clause provides relief for a person's losses in an employment or office. It is based on section 380(1) of ICTA.

413.     The reference to "office" is new, but reflects long-standing HMRC practice of allowing the holder of an office to set-off losses against general income. See Change 18 in Annex 1.

414.     Section 384A of ICTA restricts relief under section 380 of ICTA in relation to avoidance schemes entered into by individuals carrying on a leasing trade, or another qualifying activity, and involving first-year allowances. See clause 76.

415.     As section 380 of ICTA provides relief for losses in an employment (as well as in a trade) the restriction in section 384A of ICTA is, in principle, applicable to an employment loss.

416.     In view of the remote possibility of section 384A of ICTA ever applying to employment losses, this clause is not subject to a restriction equivalent to that in clause 76. See Change 19 in Annex 1.

Clause 129: How relief works

417.     This clause explains how deductions are made. It is based on section 380(1) and (2) of ICTA.

418.     Subsections (2) and (3) provide that, if claims are made in respect of employment losses incurred in successive tax years and both claims specify that the relief is to be given against income of the same tax year, the claim in respect of the loss in the earlier year takes priority.

419.     Subsection (4) makes it explicit that this rule also operates in relation to the interaction between claims for employment losses and those for trade losses.

Clause 130: Treating loss in employment or office as CGT loss

420.     This clause is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of employment loss relief. It is new.

Chapter 6: Losses on disposal of shares

Overview

421.     This Chapter is based on sections 305A and 574 of ICTA and, to the extent that they supplement section 574 of that Act, sections 575 and 576 of that Act. So far as sections 575 and 576 of ICTA supplement section 573 of that Act (share loss relief for companies), they continue in force, together with new sections 576A to 576L of ICTA (see Schedule 1 and the commentary on those new sections of ICTA).

422.     Section 574 of ICTA provides for relief against income tax for allowable losses for capital gains tax purposes incurred on the disposal of ordinary shares in qualifying trading companies for which an individual has subscribed.

423.     Section 305A of ICTA provides that section 574 of that Act also applies, with minor modifications, on the disposal by an individual of shares to which enterprise investment scheme income tax relief is attributable under Chapter 3 of Part 7 of ICTA. The provisions of section 305A of ICTA are included as an integral part of this Chapter and a signpost to this Chapter is included in clause 161 in Part 5 (Enterprise investment scheme).

424.     Section 125A of TCGA introduced by Schedule 1 is based on section 576(2) and (3) of ICTA, which have effect only for the purposes of capital gains tax or corporation tax on chargeable gains, and on sections 573(4) and 574(1) of ICTA which have effect only for the purposes of corporation tax on chargeable gains and capital gains tax respectively. See the commentary on section 125A of TCGA in Schedule 1.

425.     This Chapter contains 21 clauses structured as follows:

• three setting out the basic conditions for share loss relief, the entitlement of the individual to make a claim and how the relief works;

• thirteen applying only to shares to which EIS relief is not attributable and setting out requirements to be satisfied if relief is to be available on the disposal of such shares;

• three applying generally and dealing with limits on relief and the identification of shares disposed of; and

• two containing miscellaneous and supplementary provisions.

Clause 131: Share loss relief

426.     This clause deals with eligibility for share loss relief and the requirements relating to the kinds of disposal and to the type of shares disposed of. It is based on sections 305A(1), 574(1) and 575(1) and (3) of ICTA.

427.     Subsection (1)(b) provides that the disposal must be of "qualifying shares". Subsection (2) provides that shares are qualifying shares if either EIS relief is attributable to them or they are shares in a qualifying trading company for which the individual has subscribed. EIS relief is defined in clause 151(1) and includes not only relief under Part 5 attributable to shares issued on or after 6 April 2007 (see clause 201) but also relief under Chapter 3 of Part 7 of ICTA attributable to shares issued after 31 December 1993 and before 6 April 2007 (see section 289B of that Act).

428.     Subsection (3)(a) is based on section 575(1)(a) of ICTA which specifies as one of the kinds of disposal:

a disposal by way of a bargain made at arm's length for full consideration.

Subsection (3)(a) omits the words "for full consideration" on the basis that they add nothing. See Change 20 in Annex 1.

Clause 132: Entitlement to claim

429.     This clause deals with the making of a claim for share loss relief. It is based on section 574(1) of ICTA.

430.     This clause makes explicit what is only implicit in section 574(1) of ICTA:

• in subsection (1), that a claim may be made for both the tax year in which the allowable loss is incurred and the previous tax year;

• in subsection (2), what is required in practice to establish how the claim is to apply to each year; and

• in subsection (3), that, in the case of a claim in respect of one year only, the claim must specify which year.

Clause 133: How relief works

431.     This clause explains how deductions for the loss are to be made. It is based on section 574(1) and (2) of ICTA.

432.     Subsection (1) states explicitly what is implicit in section 574(1) of ICTA, that:

• the whole amount of the loss must be deducted in calculating the claimant's net income for the specified tax year; and

• if a claim is made in respect of two tax years, then only so much, if any, of the amount of the loss which it has not been possible to deduct from the claimant's income for the specified year can be deducted in calculating the claimant's net income for the other year.

433.     This clause does not include the words in section 574(1)(a) and (b) of ICTA which limit the amount of the deduction for any tax year to the whole of the claimant's income for the year, where the income is less than the amount of the loss. That limit is included in clause 25(5) and (6). Clause 25 explains how the reliefs listed in clause 24, which include share loss relief, are to be deducted at Step 2 of clause 23 in order to calculate the claimant's net income.

434.     Subsection (5) is new. It makes explicit that the balance of any allowable loss for which share loss relief is not obtained continues to be capable of being claimed as a deduction under TCGA.