Partnership Loan Written Off

[TN]

Hi

Two individuals set up in business as a partnership. They obtain funding by way of loans from third parties (individuals). In the first couple of years of trading the partnership spends a lot of its cash developing products but doesn't realise any income.

In year 5 (say) one of the individual loan providers decides that he wants his money back. The partnership doesn't have much cash and agrees to pay back 20% of the investors loan in full and final settlement.

If this were a company rather than a partnership I believe we would be in the loan relationship rules and the loan written off would be treated as a credit and taxable. However, these rules don't apply to partnerships.

So the question is does the write off of 80% of the loan capital need to be recorded as income in the partnership accounts, and does it therefore become trading income of the partners?

Any thoughts will be appreciated.
Thanks