Revenue Note for Guidance

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Revenue Note for Guidance

253 Relief to individuals on loans applied in acquiring interest in partnerships

Summary

This section provides for unrestricted relief to be given to an individual for interest on money borrowed to enable him/her to acquire a share in a partnership or to contribute or advance money to a partnership. To ensure that the relief is confined to genuine cases, the condition is imposed that the individual must, throughout the period from the application of the proceeds of the loan until the interest is paid, have personally acted as a partner in the conduct of the trade or profession carried on by the partnership. There are provisions to restrict the relief on the money borrowed where the individual has recovered any capital from the partnership.

The granting of relief under this section does not preclude a claim for unrestricted relief on other “business” interest under section 81.

The relief is not available for new loans made on or after 15 October 2013 unless the loan replaces an existing qualifying loan and the replacement loan does not exceed the balance and term of the existing loan but the restrictions introduced by the Finance (No 2) Act 2013 also apply to any new loan. For qualifying loans made before 15 October 2013, relief is phased out over the tax years 2014 to 2016. No relief is available for the tax year 2017 and subsequent tax years. This restriction on relief does not apply where the partnership is a farm partnership within the meaning of section 598A.

Details

Application

(1) The section applies to a loan used —

  • to buy a share in a partnership,
  • to contribute money to a partnership by means of capital or a premium,
  • to contribute money to a partnership to be used wholly and exclusively for the purposes of the partnership business, or

to pay off another qualifying loan.

Conditions for relief

(2) The conditions which must be satisfied to enable the borrower to obtain relief without restriction are —

  • that throughout the period from the application of the borrowed money until the interest is paid he/she must have personally acted in the conduct of the partnership business as a partner in the partnership, and
  • he/she must not have recovered any capital from the partnership in that period apart from any amount taken into account in subsection (3).

Recovery of capital

(3) If the borrower recovers an amount of capital from the partnership without using it in reducing the loan, the borrower is thereafter to lose relief on a corresponding part of the interest.

(4)(a) The borrower is to be treated as recovering an amount of capital if —

  • the borrower receives money or money’s worth for the sale of any part of his/her interest in the partnership,
  • the partnership returns any of the capital to the borrower or the partnership repays any part of the loan, or
  • the borrower assigns any debt due to him/her from the partnership for money or money’s worth.

(4)(b) If the borrower gives away any part of his/her interest in the partnership at less than arm’s length value, he/she is treated as having recovered from the partnership the market value of what is given away.

Substituted loans

(5) Where relief is claimed under subsection (1)(c) for interest on a substituted loan, subsections (2), (3) and (4) apply as if all the loans were one loan.

Use of loan

(6) The loan must have been made in connection with the application of the money and must have been made either on the occasion of its application or within what is in the circumstances a reasonable time, and the loan must not have been applied for some other purpose before being applied as described in subsection (1). The placing on temporary deposit, for example, with a bank or a building society, of loans of predetermined amounts should not be regarded as an application of the loans for “some other purpose”.

The relief

(7) Interest eligible for relief under this section is to be treated as a non-retainable charge on the borrower’s income for the year in which the interest is paid. This enables relief to be given by repayment if necessary. In other words, the interest is to be treated as a deduction in computing the amount of the borrower’s income chargeable to tax. Interest eligible for relief under this section is not eligible for relief under any other provision.

Phasing out the relief for some partnerships

(8) & (9) The relief is not available for interest paid on new loans made on or after 15 October 2013

Furthermore the relief is not available, as and from 1 January 2017 for interest paid on loans made prior to 15 October 2013 and for such loans for the tax year 2014, 75% of the qualifying interest paid qualifies for relief; for the tax year 2015, 50% of the qualifying interest qualifies for relief; and for the tax year 2016, 25% of the qualifying interest qualifies for relief.

(10) The restrictions on relief outlined in subsection (8) and (9) do not apply where the partnership is a farm partnership within the meaning of section 598A.

(11) Subsection (10) which abolished the relief for new loans does not apply to loans which replace existing qualifying loans, provided the new loan does not exceed the balance or the term of the original loan.

Relevant Date: Finance Act 2020