When a partnership makes a trading loss, a common assumption is that the partnership itself must decide how to deal with it. In UK tax law, that assumption is incorrect, and it matters. There is no such concept as a “partnership loss” in the sense of a single entity claiming relief. The loss belongs to the individual partners, each of whom may claim relief independently, in accordance with their own personal tax position.
Understanding this distinction is fundamental to making informed decisions about loss relief. A choice that is clearly optimal for one partner may be inappropriate, or even actively disadvantageous, for another. This article explains how losses arising in a partnership are allocated, what relief options are available, and how to evaluate which route is most advantageous in any given set of circumstances.
The Allocation Process: No Change When There Is a Loss
The three-step approach to partnership taxation applies equally whether the partnership has made a profit or a loss. The accounts are adjusted for tax purposes to arrive at a tax-adjusted loss. That loss is then allocated between the partners in accordance with the loss-sharing ratios for the accounting period. Once the allocation is complete, each partner is treated as a sole trader who has made a trading loss in that amount.
The legislative basis for this approach is section 850 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). The same provisions that govern the allocation of profits also govern the allocation of losses.
Core principle: There is no concept of a partnership loss in UK income tax law. Once the loss has been allocated to each partner individually, each partner decides independently how to claim relief. One partner may carry the loss back against income of the prior year; another may prefer to carry it forward. The partnership as an entity has no role in that decision.
The Five Available Relief Routes
Once a partner has been allocated their share of a trading loss, they have access to the same relief options that would be available to a sole trader in equivalent circumstances. Those options are as follows.
Section 64 ITA 2007: Current Year and Carry Back
Under section 64 of the Income Tax Act 2007 (ITA 2007), a trading loss may be set against the partner’s net income for the year of the loss and/or the preceding tax year. “Net income” refers to total income from all sources before the personal allowance. This route provides relief as quickly as possible, since it is applied against income that has already been assessed rather than waiting for future trading profits.
A claim under section 64 must be made for the full amount of the loss (subject to available income); it is not possible to make a partial claim. In consequence, it is important to consider whether the relief will be wasted. If the partner’s net income for the target year is below or close to the personal allowance threshold, a section 64 claim would reduce the income to a level where the personal allowance cannot be fully used, effectively wasting part of the available relief.
Section 71 ITA 2007 and Section 261B TCGA 1992: Capital Gains
Where a section 64 claim has been made for the year of the loss, and net income has been reduced to nil, any remaining loss may be set against capital gains arising in the same year. This requires a prior section 64 claim; the capital gains route is not available independently. It is governed by section 71 of ITA 2007 in conjunction with section 261B of the Taxation of Chargeable Gains Act 1992 (TCGA 1992).
Section 83 ITA 2007: Carry Forward
Under section 83 of ITA 2007, a trading loss may be carried forward without time limit and set against future profits from the same trade, that is, future profits from the partnership. This route avoids the risk of wasting the personal allowance, since the loss can be offset in a year when the partner has sufficient taxable income to benefit from it at a meaningful rate. The disadvantage is that relief is deferred to a future year, and the tax saving is therefore delayed.
Section 72 ITA 2007: Early Trade Loss Relief (New Partners)
A partner who joins a partnership and incurs a loss in any of the first four tax years of their membership is entitled to claim early trade loss relief under section 72 of ITA 2007. This relief allows the loss to be carried back and set against the partner’s net income for the three preceding tax years on a first in, first out (FIFO) basis, with the earliest year relieved first.
The new partner is treated as having commenced trading on the date of admission. Section 72 is therefore available in the same way as for a new sole trader in their early years, reflecting the treatment of a newly admitted partner as a person beginning a business.
Section 89 ITA 2007: Terminal Trade Loss Relief (Retiring Partners)
Where a partner retires from a partnership and their final period produces a trading loss, terminal trade loss relief under section 89 of ITA 2007 is available. This allows the loss from the final twelve months of trading to be carried back against the partner’s trading income for the preceding three tax years on a last in, first out (LIFO) basis, with the most recent year relieved first.
Terminal loss relief operates in addition to the general provisions of section 64. It provides a separate and potentially more far-reaching route for a retiring partner who has made losses in the final period of membership.
| Relief | Legislation | Direction | Who May Claim | Key Consideration |
|---|---|---|---|---|
| s.64 | ITA 2007 | Current yr / prior yr | All partners | Risk of wasting PA |
| s.71 + s.261B | ITA 2007 / TCGA 1992 | Capital gains same yr | All partners | s.64 claim required first |
| s.83 | ITA 2007 | Forward (same trade) | All partners | Relief deferred |
| s.72 | ITA 2007 | 3 yrs back (FIFO) | New partners only | First 4 years only |
| s.89 | ITA 2007 | 3 yrs back (LIFO) | Retiring partners only | Final 12 months only |
Choosing the Optimal Route: Worked Example
Scenario: Alex and Jordan are in partnership sharing profits and losses equally. In the year ended 31 March 2024, the partnership made a tax-adjusted loss of £36,000. Each partner is therefore allocated a loss of £18,000 for 2023/24.
Alex: In 2022/23, Alex had trading income of £10,000 from the partnership and property income of £24,000 from a rental property. In 2023/24, Alex has no trading income (the partnership made a loss) and property income of £24,000.
Jordan: In both 2022/23 and 2023/24, Jordan has minimal income covered by the personal allowance, with the exception of a small investment income. Jordan expects partnership profits to be significantly higher in 2024/25.
Required: Consider the optimal loss relief for each partner.
Alex
Alex has property income of £24,000 in 2023/24 and total net income in 2022/23 of £34,000 (£10,000 trading plus £24,000 property). The options under section 64 are as follows.
| Tax Year | Net Income Before Relief £ | s.64 Relief £ | Revised Net Income £ |
|---|---|---|---|
| 2022/23 | 34,000 | (18,000) | 16,000 |
| 2023/24 | 24,000 | (18,000) | 6,000 |
Carrying the loss back to 2022/23 is preferable for two reasons. First, relief is obtained earlier, which is generally more advantageous in financial terms. Second, in 2022/23 Alex’s net income of £34,000 exceeds the personal allowance (£12,570 for 2022/23), meaning the full loss of £18,000 would reduce taxable income from approximately £21,430 to £3,430, obtaining relief at the basic rate of 20% on the full amount. A current year claim in 2023/24 would achieve the same rate but defers the benefit by one year.
In contrast, a section 83 carry forward would only provide relief when partnership profits recover, which may not be until 2024/25. Where relief can be obtained sooner at the same rate, the carry-back route is generally preferable.
Jordan
Jordan’s income in both 2022/23 and 2023/24 is insufficient to make a section 64 claim worthwhile; a claim in either year would eliminate taxable income and waste the personal allowance, producing a tax saving of nil or close to nil. Given that Jordan expects significant partnership profits in 2024/25 (at which point income will exceed the basic rate threshold), a section 83 carry-forward claim is the optimal choice. The loss of £18,000 will be offset against higher taxable income, obtaining relief at the higher rate of 40%.
Key principle, individual decision-making: Alex and Jordan are under no obligation to make the same claim. Each partner independently assesses the most advantageous route for their personal tax position. Jordan’s preference for a carry forward does not bind Alex’s decision, and vice versa. This flexibility is one of the defining features of partnership loss relief under UK tax law.
Loss Relief Restrictions
Claims under sections 64 and 72 of ITA 2007 are subject to the sideways loss relief restriction. This limits the amount that may be claimed in any single tax year to the greater of £25,000 or 25% of the partner’s adjusted total income. Partners with large income and modest losses will rarely encounter this restriction in practice, but it is worth noting where a significant loss is allocated to a partner with otherwise limited income.
Additionally, limited partners and sleeping partners face further restrictions on the loss relief they may claim, based on the amount of capital they have contributed to the partnership. These provisions are designed to prevent the use of partnership structures to generate artificial losses beyond the economic exposure of the individual concerned.
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