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HMRC internal manual

Business Income Manual

Partnerships - loss relief restrictions: risk-free capital contributions

Partnerships (Restrictions on Contributions to a Trade) Regulations 2005, SI 2005 No 2017

With effect from 2 December 2004, amounts are excluded from counting as a capital contribution for the purposes of restrictions on sideways loss reliefs that may be claimed by affected partners (see BIM82601) in two further situations.

Cost of contributions financed by loans

The first situation is where the partner takes out a loan to finance a contribution, and the loan is on limited or non-recourse terms, or the cost of repaying the loan is or may be borne, assumed or released by someone else.

‘Recourse’ describes the extent to which the lender can require the borrower to use its funds, assets or revenues to pay a debt. If a loan is ‘full recourse’ the borrower is required to use any money, assets or revenues that it has to pay the debt when due. If a loan is ‘limited recourse’ the borrower can only be required to use certain money, assets or revenues identified in the loan document to repay the debt. A ‘non-recourse’ debt is one for which the borrower is not personally liable.

There is also a backup test which applies if the partner’s loan repayment costs over any period of five years are less than they would be on arm’s length commercial terms. This will particularly apply to capital contributions financed by full recourse loans, repayments of which are not, in practice, made on a commercial basis over any relevant five year period.

Detailed guidance on excluding contributions in these situations is at BIM82660.

Cost of contributions reimbursed to partner

The second situation is where arrangements are made so that the financial cost to the partner of making the contribution can be reimbursed by someone else.

Detailed guidance on excluding contributions in this situation is at BIM82665.


There are specific exemptions to ensure that a contribution is not excluded where the financial cost of making it is or may be borne by another person in acceptable circumstances such as in the normal course of social, personal or family relationships or where the partner making the contribution becomes insolvent.

Detailed guidance on the exemptions is at BIM82670.

Background to the Regulations

The Regulations counter complex tax avoidance schemes, particularly used by partnerships in the film industry, in which partners’ capital contributions were boosted by amounts the cost of which the partner did not have to bear.