What is the purpose of section 388 of the Income Tax Act 2007?

Section 388 sets out the conditions under which an individual partner may claim tax relief on interest paid on a loan used to buy plant or machinery for partnership use. The asset must be used in the partnership's trade, profession, or property business, and the partnership must be entitled to capital allowances or liable to a balancing charge on the asset.

What conditions must be met for interest relief under section 388?

Two main conditions apply. First, the plant or machinery must actually be in use for the partnership's qualifying business activity. Second, the partnership must be entitled to claim a capital allowance or be liable to a balancing charge on the asset under section 264 of the Capital Allowances Act 2001 for the period of account in which the interest is paid.

Does relief continue if the asset has been fully written down for capital allowances?

Yes. Even if no capital allowance or balancing charge arises in a particular period, the condition is still treated as met provided the partnership was previously entitled to an allowance or liable to a charge in an earlier period and no disposal value has been brought into account. Relief is not lost simply because the asset is fully written down.

Where do the key definitions in section 388 come from?

Capital expenditure, period of account, and property business all take their meanings from the Capital Allowances Act 2001, not from the general definitions in the Income Tax Act 2007. This is significant because those terms can carry different meanings depending on which Act's definition applies, and it confirms that property businesses carried on in partnership also qualify.

Income Tax Act 2007 section 388

Loan to buy plant or machinery for partnership use

Section 388 sets out the conditions under which tax relief on interest is available where an individual partner takes out a loan to buy plant or machinery that is then used by the partnership.

The loan must be used for capital expenditure on plant or machinery that is in use for a trade, profession, or property business carried on by a partnership.
The partnership must be entitled to a capital allowance or liable to a balancing charge on that plant or machinery under the capital allowances rules for the period of account in which the interest is paid.
Relief continues even if no allowance or charge arises in the current period, provided the partnership was previously entitled and no disposal value has been brought into account.
Key terms — capital expenditure, period of account, and property business — take their meanings from the Capital Allowances Act 2001, not from the general definitions elsewhere in the Income Tax Act.

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