Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
214

Loans for investing in partnerships
398
Loan to invest in partnership
(1)
This section applies to a loan to an individual that is used in one or more of the
ways specified in subsection (2).
(2)
The ways are—
5
(a)
purchasing a share in a partnership,
(b)
contributing money to a partnership, by way of capital or premium,
that is used wholly for the purposes of the trade or profession carried
on by the partnership,
(c)
advancing money to a partnership that is so used, and
10
(d)
repaying another loan to which this section applies.
(3)
This section is subject to section 411 (ineligibility of interest where business is
occupation of commercial woodlands).
399
Eligibility requirements for interest on loans within section 398
(1)
Interest on a loan within section 398 to an individual is eligible for relief only if
15
conditions A and B are met.
(2)
Condition A is that throughout the period from the use of the loan until the
interest is paid the individual has been a member of the partnership otherwise
than—
(a)
as a limited partner in a limited partnership registered under the
20
Limited Partnerships Act 1907 (c. 24), or
(b)
as a member of an investment LLP.
(3)
Condition B is that in that period the individual has not recovered any capital
from the partnership, apart from any amount taken into account under section
406(2) (recovered capital that is treated as a repayment of the loan).
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(4)
If section 400 (film partnerships) applies in a tax year, only 40% of the interest
that would otherwise be eligible for relief for that year is eligible.
(5)
For the purposes of subsection (2) an individual who is not a member of a
partnership is treated as such a member if—
(a)
the partnership carries on a profession,
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(b)
the individual is employed by the partnership in a senior capacity, and
(c)
the individual is allowed—
(i)
to act independently in dealing with clients of the partnership,
and
(ii)
to act generally in such a way as to be indistinguishable from
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the partners in relations with those clients.
(6)
For the purposes of subsection (2) “investment LLP” means a limited liability
partnership—
(a)
whose business consists wholly or mainly of the making of
investments, and
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(b)
the principal part of whose income is derived from investments,

and whether a limited liability partnership is an investment LLP is determined
for each period of account of the partnership.

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
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400
Film partnerships
(1)
This section applies in a tax year if—
(a)
the partnership (“the film partnership”) carries on a trade,
(b)
the profits or losses of the trade are calculated in accordance with
Chapter 9 of Part 2 of ITTOIA 2005 (films etc),
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(c)
the loan is secured on an asset or activity of another partnership (“the
investment partnership”),
(d)
the individual to whom the loan is made (“A”) is or has been a member
of the investment partnership, and
(e)
at any time in the year the proportion of the profits of the investment
10
partnership to which A is entitled is less than the proportion of that
partnership’s capital contributed by A at that time.
(2)
For the purposes of subsection (1)(c), a loan is secured on an asset or activity of
a partnership if there is an arrangement—
(a)
under which such an asset may be used or relied upon wholly or partly
15
to guarantee repayment of any part of the loan, or
(b)
because of which any part of the loan is expected to be repaid directly
or indirectly out of assets held by or income accruing to the partnership.
(3)
In subsection (1)(e)—
“profits” excludes any amount that would not be taken into account as, or
20
for the purposes of calculating, income for income tax purposes, and
“partnership’s capital” means—
(a)
anything that is, or in accordance with generally accepted
accounting practice would be, accounted for as partners’ capital
or partners’ equity, and
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(b)
amounts lent to the partnership by partners or persons
connected with partners.
(4)
So far as the investment partnership’s capital includes at any time any of the
following amounts, they are treated as amounts contributed by A—
(a)
any amount A paid to acquire any interest in the partnership, so far as
30
A retains the interest at that time,
(b)
any amount made available by A directly or indirectly to another
person, so far as that person retains any interest in the partnership at
that time,
(c)
any amount A lent to the partnership, so far as it has not been repaid at
35
that time,
(d)
any amount A made available directly or indirectly to another person,
so far as any amount that person lent to the partnership has not been
repaid at that time, and
(e)
an amount made available in any other way prescribed by regulations
40
made by the Commissioners for Her Majesty’s Revenue and Customs.
(5)
Regulations under subsection (4)(e)—
(a)
may make provision having retrospective effect,
(b)
may make provision generally or only in relation to specified cases or
circumstances,
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(c)
may make different provision for different cases or circumstances,
(d)
may make transitional, consequential or incidental provision, and

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
216

(e)
may be made only if a draft of them has been laid before and approved
by a resolution of the House of Commons.
(6)
In this section a reference to A includes a reference to a person connected with
A.
(7)
Section 927 (meaning of “connected” persons) applies for the purposes of this
5
section with the omission of subsections (3) to (7).
Loans for investing in co-operatives
401
Loan to invest in co-operative
(1)
This section applies to a loan to an individual that is used in one or more of the
ways specified in subsection (2).
10
(2)
The ways are—
(a)
acquiring shares in a body which is a co-operative,
(b)
lending money to any such body which is used wholly and exclusively
for the purposes of the business of that body or of a subsidiary of that
body, and
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(c)
repaying another loan to which this section applies.
(3)
In this Chapter—
“co-operative” means a common ownership enterprise or a co-operative
enterprise as defined in section 2 of the Industrial Common Ownership
Act 1976 (c. 78), and
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“subsidiary”, in relation to a co-operative, has the same meaning as for the
purposes of section 2 of that Act.
402
Eligibility requirements for interest on loans within section 401
(1)
Interest on a loan within section 401 to an individual is eligible for relief only if
conditions A to C are met.
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(2)
Condition A is that when the interest is paid the body continues to be a co-
operative.
(3)
Condition B is that in the period from the use of the loan to the payment of the
interest the greater part of the individual’s time has been spent working as an
employee of the body or of a subsidiary of the body.
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(4)
Condition C is that in that period the individual has not recovered any capital
from the body, apart from any taken into account under section 406(2)
(recovered capital that is treated as a repayment of the loan).
Loans for paying inheritance tax
403
Loan to pay inheritance tax
35
(1)
This section applies to a loan to the personal representatives of a deceased
person if the loan is used—
(a)
in paying inheritance tax that meets the condition specified in
subsection (2), or
(b)
in repaying another loan to which this section applies.
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Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
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(2)
The condition is that the personal representatives are obliged to pay the tax
under section 226(2) of IHTA 1984 (obligation of personal representives to pay
tax on delivery of their account).
(3)
A written statement appearing to be from an officer of Revenue and Customs
is sufficient evidence—
5
(a)
of the amount of inheritance tax that meets the condition specified in
subsection (2), and
(b)
of any statements relevant to its calculation.
(4)
In this section references to inheritance tax include interest payable on that tax.
404
Eligibility requirements for interest on loans within section 403
10
Interest on a loan within section 403(1) is eligible for relief only so far as it is
paid in respect of a period ending within 12 months from the making of the
loan used as mentioned in section 403(1)(a).
405
Carry back and forward of relief for interest on loans within section 403
(1)
This section applies if relief for any interest on a loan within section 403(1) that
15
is eligible for relief cannot be given for the tax year in which the interest is paid
because there is not enough income in that year.
(2)
The person paying the interest is entitled to relief for that interest—
(a)
for the preceding tax year, or
(b)
if there is not enough income in that year, for the tax year preceding it,
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and so on.
(3)
If relief cannot be given under subsection (2), it may instead be given—
(a)
for the tax year following that in which the interest is paid, or
(b)
if there is not enough income in that year, for the tax year following it,

and so on.
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General and supplementary
406
Effect of recovery of capital in the case of some loans
(1)
This section applies if the individual to whom a loan is made to which section
392, 396, 398 or 401 applies recovers any amount of capital from the company,
partnership or co-operative concerned at any time after the loan is used.
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(2)
The individual is treated for the purposes of this Chapter as having repaid that
amount out of the loan at that time, whether or not such a repayment occurred.
(3)
Accordingly, only part of the interest that, apart from any such repayment,
would be payable on the loan for any period after that time and eligible for
relief is so eligible.
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(4)
That part is so much of that interest as is attributable to the amount of the loan
after the repayment.
(5)
In the case of a loan to which section 386 applies (loans partly meeting
requirements), subsection (3) applies instead of section 386(3) (under which

Income Tax Bill
Part 8 — Other reliefs
Chapter 1 — Interest payments
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repayments are apportioned between the qualifying and non-qualifying parts
of such loans).
(6)
The cases in which an individual is treated as having recovered an amount of
capital for the purposes of this section are set out in section 407(1) to (3).
407
Events counting as recovery of capital for section 406
5
(1)
An individual is treated as having recovered an amount of capital from a
company for the purposes of section 406 if—
(a)
the individual receives consideration of that amount or value—
(i)
for the sale, exchange or assignment of part of the ordinary
share capital of the company,
10
(ii)
by way of repayment of part of that ordinary share capital, or
(iii)
for assigning a debt due to the individual from the company, or
(b)
the company repays that amount of a loan or advance from the
individual.
(2)
An individual is treated as having recovered an amount of capital from a
15
partnership for those purposes if—
(a)
the individual receives consideration of that amount or value—
(i)
for the sale, exchange or assignment of part of the individual’s
interest in the partnership, or
(ii)
for assigning a debt due to the individual from the partnership,
20
or
(b)
the partnership repays that amount of a loan or advance from the
individual, or
(c)
the partnership returns that amount of capital to the individual.
(3)
An individual is treated as having recovered an amount of capital from a co-
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operative for those purposes if—
(a)
the individual receives consideration of that amount or value—
(i)
for the sale, exchange or assignment of part of the individual’s
shares in the co-operative,
(ii)
by way of repayment of part of the individual’s shares in the co-
30
operative, or
(iii)
for assigning a debt due to the individual from the co-operative,
or
(b)
the co-operative repays that amount of a loan or advance from the
individual.
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(4)
A sale or assignment that is not a bargain made at arm’s length is treated for
the purposes of this section as being made for a consideration of an amount
equal to the market value of what is disposed of.
408
Replacement loans
(1)
This section applies to a replacement loan.
40
(2)
In subsection (1) “replacement loan” means a loan to which section 392, 396,
398 or 401 applies because the loan is used in repaying another loan (“the
replaced loan”) to which that section applies.

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Chapter 1 — Interest payments
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(3)
This Chapter, except for sections 385 and 386, applies to the replacement loan
as if that loan and the replaced loan were a single loan (subject to subsection
(5)).
(4)
Accordingly, any restriction under section 406 (effect of recovery of capital in
the case of some loans) which applies to the replaced loan applies to the
5
replacement loan.
(5)
But this Chapter, except for sections 385 and 386, applies as if references to the
use of the loan were references to the use of the original loan.
409
Business successions between partnerships
(1)
This section applies if—
10
(a)
a loan to which section 398 applies is made to an individual,
(b)
the partnership in question (“the old partnership”) is dissolved,
(c)
on its dissolution another partnership of which the individual is a
member (“the new partnership”) is formed to carry on the whole or part
of the undertaking carried on by the old partnership, and
15
(d)
interest payable on the loan for the period ending with the dissolution
of the old partnership was eligible for relief (or would have been had
any been payable).
(2)
This Chapter applies as if the old partnership and the new partnership were
the same partnership.
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(3)
Section 399(5) (salaried partners etc treated as partners) applies for the
purposes of subsection (1)(c) as it applies for the purposes of section 399(2).
410
Other business successions and reorganisations
(1)
This subsection applies if—
(a)
a loan to which one of the business loan provisions or section 398 (loan
25
to invest in partnership) applies is made to an individual (“the original
loan”),
(b)
the company, partnership or co-operative in question is involved in a
transaction as a result of which the individual acquires shares in or
makes a loan to another company or a body that is a co-operative,
30
(c)
interest payable on the original loan for the period ending with the time
of the transaction was eligible for relief (or would have been had any
been payable), and
(d)
had the original loan been made at the time of the transaction and
applied in acquiring the shares in or making the loan to the other
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company or the co-operative, the original loan would have fallen
within one of the business loan provisions.
(2)
If subsection (1) applies, from the time of the transaction referred to in
subsection (1)(b) the original loan is treated as if it had been made and applied
as mentioned in subsection (1)(d).
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(3)
In this section “the business loan provisions” means—
(a)
section 392 (loan to buy interest in close company),
(b)
section 396 (loan to buy interest in employee-controlled company), and
(c)
section 401 (loan to invest in co-operative).