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HMRC internal manual

Partnership Manual

From
HM Revenue & Customs
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Calculating the taxable profits: interest paid by the partnership

Normal principles apply when considering whether interest paid by the partnership is deductible for tax purposes. Interest is allowable as a deduction in computing business profits or losses if it is incurred wholly and exclusively for the purposes of the business. There are some special considerations, however.

A partner may borrow money, e.g. from a bank, to acquire an asset personally but permit the partnership to use the asset without charge. In such circumstances, it may be agreed that the partnership will pay the interest on the loan and charge it to the partnership accounts. The interest payable by the partnership will normally be allowable in this situation. However, there are occasions when the interest deduction will be fully or partially restricted, such as where there is also some non-business use of the asset or where the amount of interest payable exceeds ordinary commercial consideration for the use of the asset. The amount restricted will represent a distribution of profit to the partner. Further guidance is available at BIM45755.

Interest may be paid by the partnership to a partner on their capital account. This is not an allowable deduction as it represents an allocation of profit to the partner (see BIM45735).

A partner’s capital account may become overdrawn. This could be because they have taken drawings in excess of the amount that they have put in as capital contributions or earned in profits. If any of the partnership’s borrowing is used to fund a partner’s excess drawings, interest deductions on the borrowing will be restricted. Detailed guidance can be found at BIM45690 onwards.