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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Distributions: general: interest or other value in respect of securities - reasonable commercial return - examples

CTA10/S1000 (1) E

Fixed interest rate loan issued at par

A security is issued for a term of 1 year at £100 with a coupon at a commercial rate of 5 per cent. The investor receives £105 at the end of the year.

CTA10/S1000 (1) E will not bite. The return (5 per cent) for the principal secured (£100) is commercially reasonable.

Fixed interest loan issued at a premium

A security with a par value of £100 is issued for a term of one year, at a premium of £2, for £102. The coupon is at a commercial rate of 7.1 per cent to recognise the fact that £2 capital will not be returned. The investor receives £107.10 at the end of the year.

The return by reference to the principal secured plus the premium is £5.10 (£107.10 less £102). £102 @ 5 per cent equates to £5.10, which constitutes an aggregate commercial rate of interest under CTA10/S1007 for the principal secured, and for the premium. The provision will not apply if CTA10/S1008 applies.

Consideration exceeds the amount of principal secured.

In the example at 2 above, CTA10/S1008 will apply if CTA10/S1007 does not, subject to CTA10/S1009 and CTA10/S1012. Under this provision, the principal secured is treated as the new consideration of £102. A return of £5.10, which is 5 per cent of £102, is commercially reasonable for the use of the principal secured and therefore no distribution arises under CTA10/S1000 (1) E

CTA10/S1000 (1) E would still apply to the excessive return, notwithstanding the application of CTA10/S1007 or CTA10/S1008 if the rate in the example were 7 per cent and a reasonable commercial rate 5 per cent.

Stock index-linked loan, return of subscription guaranteed

A security is issued for a term of one year at £100. The return is £100 plus 70 per cent of any rise in the stock index.

There is no risk that the lender will lose any of the subscribed amount and therefore the prospect of 70 per cent of any rise in the stock index, which is freely traded on the markets, is a reasonable commercial return. CTA10/S1000 (1) E will not re-characterise any of the return as a distribution.

Stock index-linked loan, strengthening market, low guaranteed returned amount

A security is issued for a term of one year at £100. The outlook for a rising stock index appears strong, but there can, of course, be no guarantee of this.

If the stock index falls, the investor will receive:

  • the amount invested less the reduced value of the amount invested as calculated by the reduction in value of the stock index, with a guaranteed minimum amount returned of 1 per cent of the amount invested.

If the stock index rises, the investor will receive:

  • the amount invested and 80 per cent of the rise in the stock index.

CTA10/S1008 may apply. In practice, this is unlikely unless the issuer is a bank or securities house. If it applies, the principal secured will become £100. The index reflects the value of stock traded on the open market and a return less than the amount of that increase (less reasonable expenses of management of the investment) would be a reasonable commercial return. This is because at the outset the lender can only expect a maximum of the return that the commercial markets provide. CTA10/S1000 (1) E would not, therefore, apply in the above example (though it would apply to any return above a reasonable return).


Each of the distribution provisions must be considered independently.

In cases where CTA10/S1000 (1) E does not apply, because of the application of CTA10/S1008, the provisions CTA10/S1000 (1) F should be borne in mind.

The loan relationships provisions will apply if the return is treated as interest.