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HMRC internal manual

Business Income Manual

Profits from a trade of dealing in or developing UK land: Anti-fragmentation: Interest

A financial contribution is considered a relevant contribution where it includes the assumption of risk by the lender. The rules are targeted at loans which aim to transfer a portion of the project profit from the company making the disposal to an associated company.

There is a relevant contribution where there is an intra group loan which results in the lender being entitled to a proportion of the profit or gain from the project (e.g. via a profit participating loan), or an intra group loan which results in the lender taking on a portion of the risk from the project. In both of these instances the interest payments may result in profits being fragmented to the lender.

Whilst interest payments may be at arm’s length, they may still be relevant contributions. For example, if there is a mezzanine loan with an interest rate which is high - due to the lender taking on project risk - the loan could be arm’s length, but as the high interest rate is linked to the risk of the project, it would be a relevant contribution.

Anti-fragmentation does not relate to senior lending with terms and interest rates commensurate with those available in the open market or to mezzanine debt where there is no participation in the profits/gains and/or no risk premium element; it only applies where and to the extent that significant project risk is taken on by the lender.

It is likely that if the profit is insignificant then this will be because, for example, the other party has not taken on a significant level of risk in relation to the overall project, although - as with all aspects - this has to be considered in the round.

Where a loan is from an unconnected party the anti-fragmentation rules will not apply. The rules will also not apply where lending from an unconnected party has been on-lent in whole or in part on materially the same terms.

Any loan where there is no risk premium reflected in the interest and where the interest is not linked to the profit from the disposal will not be considered a relevant contribution. In these instances the interest payments will be allowable deductions unless they are disallowed by other legislation. 

Where there is a loan between connected parties which has both a portion with a risk premium and a portion without a risk premium, only the portion with the risk element will be considered to be a relevant contribution.

Example 1

Company C has raised as much bank finance as it can, at normal rates, to finance an apartment development. R makes a loan of £300m to Company C with a high interest rate to reflect taking on part of the risk of the project. In this instance the loan is a relevant contribution.


Example 2

R makes a loan of £100m to Company C, at normal senior rates, and this is 30% of the cost of the land. The loan is made for the initial acquisition of land and there are no unusual terms in the loan. In this instance the loan would not be considered to be a relevant contribution.


Example 3


In the example above the interest deductions would not be considered to be relevant contributions as they are all on-lending of external finance. Where there is external funding this can be traced through any number of companies.