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HMRC internal manual

Savings and Investment Manual

Relief for interest paid: interest in a partnership: recovery of capital

Recovery of capital

The provisions described in SAIM10280 - SAIM10300 are modified if, at any time after applying the borrowed money, claimants recover any capital from the partnership but do not use it to repay their own borrowings. (If they do so, the interest they pay and their relief claims are reduced without any need for a special rule).

ITA07/S406 provides that claimants are to be treated as if they had used the capital recovered to repay their own borrowings, whether or not they actually repaid it. The eligible interest paid by the claimants is reduced by an amount equal to interest on the capital recovered, and ceases to qualify for relief from the date the capital was recovered. If only part of the borrowing qualified, the capital recovered is to be set primarily against that part. If, later, the claimants do in fact repay part of their borrowing, the notional and the actual repayments should, so far as is possible, be treated as relating to the same part of the borrowing.

ITA07/S407 (2) defines recovery of capital in the case of a partnership as where

  • the individual receives consideration for the sale, exchange or assignment of his or her interest in the partnership, or assigning a debt due from the partnership;
  • the partnership repays any amount advanced by the claimant;
  • the partnership returns any capital to the claimant.

If transactions are not at arm’s length the consideration is to be taken to be equal to the market value.

An enquiry may be needed where it appears from the information available that consideration has been received from the sale of the interest or assignment of a debt.

Return of partnership capital is dealt with in SAIM10320.

See SAIM10340 on business successions between partnerships.

Conversion of an ordinary partnership to a Limited Liability Partnership is not regarded as a recovery of capital within ITA07/S406. Consequently there is no withdrawal of relief in these circumstances.