ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small. Change 75: Interest relief: partnership changes and business successions: sections 409 and 410
This change gives statutory effect to ESC A43 and extends it to cover partnership changes generally.
The text of ESC A43 is as follows:
1Under sections 360-363, ICTA 1988, income tax relief is available for interest paid by an individual on a loan taken out to invest in, or on-lend to, a partnership, a co-operative, a close company, or an employee-controlled company. The relief is subject to various conditions, and ceases to be available when those conditions are no longer met.2Relief is also reduced or withdrawn (following section 363) if the borrower recovers any capital from the business without using it to repay the loan – for example by selling or exchanging the interest or shares in that business. Strictly, therefore, relief ceases to be due where:(a)a partnership is incorporated into a co-operative, a close company, or an employee-controlled company; or(b)shares in a co-operative, a close company, or an employee-controlled company are exchanged for, or replaced by, shares in any one of these kinds of company; or(c)there is a partnership reconstruction involving a merger or demerger.3Under the terms of this concession, relief for interest on a loan to an individual will not be discontinued in the three kinds of circumstances described above where, in relation to that individual, the conditions for relief would have been met if the loan had been a new loan taken out by that person to invest in the new business entity. The rules restricting or withdrawing relief where the borrower recovers any capital from the business continue to apply in the normal way.”
Paragraph 2(c) of the concession refers to a merger or demerger of a partnership, but does not attempt to define either term. The circumstances considered to be in point are set out in section 409(1). That section also allows relief to continue in cases where there are partnership changes not amounting to a merger or demerger. In practice, relief is such circumstances is also allowed on what is (in strictness) considered to amount to concessionary treatment.
Cases within paragraphs 2(a) and (b) of the concession concern other types of business succession. Section 410 gives effect to the concession by allowing relief to continue in those cases and also where the original investment was by way of loan.
If the individual recovers any capital from the business then the normal rules apply.