Statutory Instruments
2006 No. 1639
INCOME TAX
The Partnerships (Restrictions on Contributions to a Trade) Regulations 2006
Made
21st June 2006
Coming into force
22nd June 2006
A draft of this instrument has been laid before the House of Commons in accordance with section 122A(5) of the Finance Act 2004( 1 ) and approved by a resolution of the House of Commons.
Accordingly, the Commissioners for Her Majesty’s Revenue and Customs make the following Regulations in exercise of the powers conferred by sections 122A(2) to (4) of the Finance Act 2004, and now vested in them( 2 ).
Citation, commencement and effect
1. —(1) These Regulations may be cited as the Partnerships (Restrictions on Contributions to a Trade) Regulations 2006 and shall come into force on the day after the day on which they are made.
(2) These Regulations shall have effect from 20th December 2005.
Interpretation
2. In these Regulations—
“ICTA” means the Income and Corporation Taxes Act 1988 ( 3 );
“ITTOIA” means the Income Tax (Trading and Other Income) Act 2005 ( 4 );
“relevant individual” means—
a limited partner (within the meaning in section 117 of ICTA),
a member of a limited liability partnership (within the meaning in section 118ZA( 5 ) of ICTA), and
a general partner (that is, not a limited partner) who does not devote a significant amount of time to the trade (within the meaning in section 118ZH( 6 ) of ICTA),
where the partnership carries on a relevant trade (within the meaning in section 122A(1) of the Finance Act 2004); and
“profit-sharing arrangements” has the meaning in section 850(6) of ITTOIA.
Scope of these Regulations
3. These Regulations apply where (and if there are successive events, in each case where)—
(a) a relevant individual disposes of his right to profits arising from a firm’s trade (within the meaning in section 120 of the Finance Act 2004),
(b) the result of the disposal is that his share of the profits (or any part of the profits) arising from the trade is reduced or extinguished, or his share of the losses (or any part of the losses) arising from the trade is increased,
(c) another person (“the new partner”) becomes a partner in the firm, and
(d) the new partner contributes or agrees to contribute an amount as capital to the partnership.
Exclusion when computing the amount of the relevant individual’s contribution to the trade
4. Where these Regulations apply—
(a) apportion the amount referred to in regulation 3(d) between the partners in the firm immediately before the new partner becomes a partner, according to their profit-sharing arrangements at that time,
(b) the amount apportioned to the relevant individual under paragraph (a) shall be excluded when computing the amount of that individual’s contribution to the trade (but not so as to produce a contribution less than nil), at the time of whichever of the events referred to in regulation 3 is the latest to occur, for the purposes of section 119(2)(b) or (c) of the Finance Act 2004, and
(c) accordingly, recalculate that individual’s contribution to the trade, as at the time of that event, for the purposes of determining—
(i) whether that event is an exit event within the meaning of section 119(2)(b) or (c) of the Finance Act 2004, and
(ii) the chargeable amount for the purposes of section 119(5) of that Act.
David Varney
Mike Hanson
Two of the Commissioners for Her Majesty’s Revenue and Customs
21st June 2006
2004 c. 12 ; section 122A was inserted by section 79 of the Finance Act 2005 (c. 7) .
The functions of the Commissioners of Inland Revenue were transferred to the Commissioners for Her Majesty’s Revenue and Customs by section 5(2) of the Commissioners for Revenue and Customs Act 2005 (c. 11) .
Section 118ZA was substituted by section 75 of the Finance Act 2001 (c. 9) .
Section 118ZH was inserted by section 124(1) of the Finance Act 2004.