Qualifying investments: Loans
CTA2010/Part 7/Chapter 2/S228; ITA/s345
For a loan to a community development finance institution (CDFI) to be treated as a qualifying investment (CITM4010) under the CITR scheme it must satisfy three conditions.
Condition 1: Receipt of loans by CDFI
- the CDFI must receive, from the investor, the full amount of the loan on the investment date,
- if the terms of the loan agreement allow the CDFI to draw down amounts of the loan over a period of time, the end of that period must be no later than 18 months after the investment date
Condition 2: Conversion and Redemption
The loan must not carry any present or future rights that would allow it to be converted into, or exchanged for any loan, securities, shares or other rights that are redeemable within a period of five years beginning with the day the investment is made (the “five year period”).
Condition 3: Repayment terms
This condition limits the rate at which a loan can be repaid if it is to be regarded as a qualifying investment. The restrictions operate by reference to the five-year period.
A loan cannot be a qualifying investment for the purposes of the CITR scheme if it is made on terms that allow any person to require:
- repayment during the first two years of the five year period of any loan capital advanced in those two years
- repayment during the third year of that period of more than 25% of the total amount advanced
- repayment before the end of the fourth year of more than 50% of the total amount advanced
- repayment before the end of the five year period of more than 75% of the total amount advanced.
|Timing of repayment within five year period||Upper limit of permitted repayment|
|Year 1||No repayments are permitted|
|Year 2||No repayments are permitted|
|Year 3||25% of the amount advanced|
|Year 4||50% of the amount advanced|
|Year 5||75% of the amount advanced|
The Treasury has the authority to vary by order the percentage limits (25%, 50%, 75%) set out above. Any variation to the limits applies only to loans made after the date specified in the Treasury order.
But a requirement to repay that arises out of any obligation of the loan agreement is disregarded if
- the obligation is imposed only because of the commercial risk to which the investor is exposed under the loan agreement, and
- the obligation is no more likely to be breached than any obligation that might have been expected to be imposed in the absence of the CITR scheme.
For example, if an investor makes a loan to a CDFI on terms that require full repayment of the outstanding loan in the event of default by the CDFI there is a requirement that may result in early repayment of the loan. But if it might be expected that a lender to whom tax relief under the CITR scheme was not available would have imposed similar terms, both in relation to the obligation to repay and the circumstances that might trigger such repayment, that requirement is disregarded for the purposes of Condition 3 (above).
Banks that specialise in investing in charitable or social enterprises may qualify for accreditation as under the CITR scheme (CITM2010). Where investors deposit money with banks the deposit is regarded as a loan from the depositor to the bank.
It is therefore possible that a deposit with a bank that is an accredited CDFI may be “a loan to which the conditions of CTA2010/Part 7/Chapter 2/S228 and ITA/s345 are satisfied” (see CTA2010/Part 7/Chapter 2/S225 and ITA/s344. In particular, note that withdrawal of money by the investor would be regarded as repayment of the loan. So the terms and conditions relating to the deposit account must restrict repayments/withdrawals to an extent that satisfies Condition 3 above.
(See CITM7122 for the treatment of a deposit made by a CDFI to a bank in the course of ordinary banking arrangements).