CFM5865 - Taxing loan relationships: partnerships: loans between partners and partnership

Lending between partners and the partnership

A partner may lend money to the partnership, and the partnership may lend to a partner. Where the partner is a company partner, the loan may be a loan relationship.

Loan or equity?

Lending by a partner to a partnership may not be true lending but be performing an equity function. The following factors may help establish the true position.

• The terms of the partnership agreement. Can the partnership repay the loan without the departure of the lender, or the dissolution of the partnership?
• The accounts treatment. Is the debt shown in the partnership accounts as a normal creditor or as partnership capital?
• The terms of the loan agreement. Does this show normal commercial rates for interest and terms of repayment?

These factors may feature particularly in venture capital limited partnerships (see CT3258). CT & VAT (Financial and Insurance Team) can advise in areas of doubt or difficulty.