CFM5881b - Taxing loan relationships: partnerships: Para 18 example

Participation: example of FA96/SCH9/PARA18

Partners Mrs A, B Ltd and C Inc have interests in the ABC partnership. The profit sharing arrangements are:

Mrs A 12%

B Ltd 39%

C Inc 49%

ABC partnership owns 100% of the share capital of D Ltd.

ABC partnership lends £100k to D Ltd on deep discounted terms. Para 18(1)(a) applies.

Participation

D Ltd is a close company as it is controlled by five or fewer participators. The participators are Mrs A, B Ltd and C Inc. Para 18(1)(b) applies. The partnership is not a collective investment scheme so there is no exclusion.

Is the full amount of the discount brought into account under FA 1996?

Mrs A is an individual and will not be bringing into account the discount under FA 1996. The exclusion at Para 18(1A) does not apply.

B Ltd is a UK corporate and will be bringing into account the discount under FA 1996. The exclusion at Para 18(1A) does apply.

C Inc is not a UK corporate and will not be bringing into account the discount under FA 1996. The exclusion at Para 18(1A) does not apply.

D Ltd will treat the loan of £100,000 as being three discounted loans of:

£12,000 from Mrs A

£39,000 from B Ltd

£49,000 from C Inc.

If discount of £10,000 is accrued during the accounting period on the loan from the partnership then D Ltd will treat discount of £1,200 as being appropriate to Mrs A, and discount of £4,900 as being appropriate to the loan from C Inc. Para 18 will therefore restrict the discount debit by £6,100 until that discount is actually paid to Mrs A and C Inc on redemption.