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HMRC internal manual

Business Income Manual

Partnerships - loss relief restrictions: exemptions

Reg6 Partnerships (Restrictions on Contributions to a Trade) Regulations 2005, SI 2005 No 2017

The regulations explained at BIM82655 onwards are intentionally wide ranging, and so specific exemptions are required to ensure that clearly acceptable situations which might lead to a partner not bearing the full cost of a capital contribution are not caught.

In particular, a partner’s contribution is not excluded (that is, still counts as a capital contribution) where:

  • the financial cost is borne or reimbursed by another individual in the normal course of the partner’s domestic, family or personal relationships, or
  • the individual is financially unable to repay a loan following events outside of his control occurring after the loan was taken out, or
  • the amount reimbursed or borne by someone else is chargeable to Income Tax on the partner as profits of a trade.

The first exemption prevents situations where friends or family contribute to the financial cost of making the contribution. For example, an individual may borrow money secured on their home for which they may be jointly liable with their spouse or civil partner. Although, someone else may be liable to repay the loan, the restriction does not apply because this is in the normal course of a family relationship.

The second exemption ensures that if a partner is unable to repay a loan used to finance a capital contribution, and the loan is written off (for example through insolvency), the contribution is not excluded for that reason. However this exemption only applies if the individual’s financial inability to pay arises as a result of events which occur after the loan was taken out. The exemption does not apply if the partner would have been financially unable to repay the loan when it was made.

The final exemption is primarily directed at partnerships involved in film sale and lease arrangements.