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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: partnerships: loans between partners and partnership

Lending between partners and the partnership

A partner may lend money to the partnership, and the partnership may lend to a partner. Where the partner is a company partner, the loan may be true lending or it may be more in the nature of equity. The following factors may help establish the true position.

  • The terms of the partnership agreement. Can the partnership repay the loan without the departure of the lender, or the dissolution of the partnership?
  • The accounts treatment. Is the debt shown in the partnership accounts as a normal creditor or as partnership capital?
  • The terms of the loan agreement. Does this show normal commercial rates for interest and terms of repayment?

These factors may feature particularly in venture capital limited partnerships (see CTM36580).

Loan relationship between partner and partnership

A loan from a company partner to a partnership that is not quasi-equity is likely to be a loan relationship. The company partner will be both

  • creditor (as the individual lender), and
  • debtor (for its share of the gross credits or debits).

It will therefore bring in credits and debits for the same loan relationship.

Conversely, where the company partner has borrowed from the partnership, it will be both debtor (as the individual borrower) and creditor (for its share of the gross credits or debits). It will therefore bring in credits and debits for the same loan relationship.

When the company partner controls the partnership, either alone or together with one or more other company partners, these debits and credits may be adjusted under the connected persons rules - see CFM35000.

Example

The members of ABC partnership, and their profit shares, are

  • Mrs A 20%
  • B Ltd 60%
  • C Ltd 20%

C Ltd lends the partnership £10,000, carrying interest at 10% per annum.

Each company (as partner) will have gross debits of £1,000, the interest accruing on the loan. This is then shared between the company partners, so that

  • B Ltd brings in a debit of £600
  • C Ltd brings in a debit of £200.

But C Ltd is also the creditor, and will bring in a credit of £1,000 for the interest accrued on the loan.