Partnership profits — Income tax — Purchase of farm — Loan interest — Whether interest allowable expenditure — Whether interest allowable against partnership profits
The plaintiff was part of a farming partnership consisting of husband, wife and son. In 1982 the partnership obtained a bank loan to purchase a third farm and the 1983 balance sheet showed some £150,000 as a liability owed to the bank. The same balance sheet showed a sum of £120,000 as a loan given to the son; he had purchased the farm. The inspector of taxes stated that the bank loan had not been used to purchase a partnership asset and that therefore the interest payable by the partnership could not be regarded as an allowable trading deduction for income tax purposes: para 4(1)(b) of Schedule 1 to the Finance Act 1974. A later and revised balance sheet showed merely a deficit on the son’s capital account.
The plaintiff appealed the decision of the commissioners, contending that the advice in Statement of Practice 4/1985 should be followed. Although this allows loan interest to be set against letting income, in practice the interest can be set against partnership profits where a partnership occupies land rent-free for partnership purposes and pays the interest in lieu of rent.
Held The practice of allowing the loan interest to be set against partnership profits could not apply in this case as the partnership was not paying interest on the son’s behalf. This was not a case where a partner had taken a loan and allowed the partnership to occupy the land acquired with the loan rent-free for partnership purposes.
John Morris Collins (instructed by Paterson Bateman & Hodgson, of Beverley) appeared for the appellant; and Alan Moses (instructed by the Solicitor of Inland Revenue) appeared for the respondents.
