As explained at
BIM56545, following changes announced on
10 February 2004 to restrict a non- active partner’s trading
loss relief to the amount of his capital contribution to the trade,
a number of schemes were devised to artificially inflate
partners’ contributions to the trade with amounts for which
they had neither borne the cost nor had any risk of doing so.
Legislation to counter these schemes was announced on 2 December
2004. This legislation works by excluding certain amounts from
being treated as a partner’s capital contribution to the
trade.
Whilst we have doubts over whether these schemes could be
used to avoid the exit charge on individuals benefited by film
relief, the Government decided to put the matter beyond doubt and
extended the restrictions on contributions to a trade to the film
exit charge. The legislation is at FA05/S79 which inserts
FA04/S122A. This applies the Partnerships (Restrictions on
Contributions to a Trade) Regulations 2005 to restrict the amount
that is deemed to be an individual partner’s capital
contribution to the trade for the purpose of determining, on or
after 2nd December 2004:
These restrictions only apply to individuals benefited by film
relief who sustained a film related loss (see
BIM56610) from a trade which they
carried on in partnership.
You should note that while the regulations only apply to exit
events occurring on or after 2 December 2004, for the purposes of
determining whether a chargeable event occurs (BIM56625), the
disposal of rights to profits arising from the trade (
BIM56620) only has to occur on or after
10 December 2003.
The restrictions on what is deemed to be a capital contribution
to a trade under the regulations, and the exemptions from these
restrictions, are described at
BIM56550. However, you should note that
the exemptions specified in the regulations are only exemptions
from the application of the restrictions in those regulations. They
are not exemptions from the rules in the primary legislation at
FA04/S121, described at
BIM56630.
For example, the regulations do not apply to restrict the
amount of a capital contribution to the trade where an
individual’s spouse may be jointly liable because (in the
example given at BIM56550) money borrowed is secured on their home.
However, this exemption does not extend to ‘reimbursement by
any person’ specified in the primary legislation for the exit
charge. Similarly, a person who has become insolvent is not
exempted under the primary legislation if his capital contribution
is reimbursed. However, whilst reimbursement can lead to an exit
event in these circumstances, it cannot lead to a chargeable event
unless there is also a disposal of rights to profits from the
trade.
