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HMRC internal manual

Company Taxation Manual

Authorised investment funds (AIFs): taxation of funds: trading or investment - ‘investment transactions’ - loan relationships and related transactions

Regulation 14H provides that any transaction which result in the diversely owned AIF becoming party to a loan relationship or a related transaction in respect of a loan relationship is an investment transaction for the purposes of regulation 14E.

A loan relationship includes all lending debts in relation to which the diversely owned AIF stands as creditor or debtor, but is not limited to such arrangements. Regulation 14L(1)(b) extends the definition to include non-lending (or ‘simple’) debts on which interest is payable or in relation to which exchange gains or losses arise. And regulation 14L(2) further extends the definition to include all debts in relation to which the diversely owned AIF stands as creditor and which give rise to a discount, whether of an income or capital nature. Regulation 14L(5) admits all debts in relation to which an instrument is issued by any person representing security for or the rights of a creditor in respect of the debt. This provision includes debentures and other debts in note form.

A related transaction, in respect of a loan relationship, means any disposal or acquisition of rights or liabilities under that loan relationship. This means that the transactions coming within regulation 14L are not limited to those whereby the diversely owned AIF becomes party to a debt as the original creditor or debtor, but includes transactions involving the acquisition or disposal of existing debts to which the diversely owned AIF was not the original party.

Regulation 14L is designed to encompass a very wide range of transactions in debt and debt instruments. As well as making loans, depositing money at interest and transactions in debentures and bonds, regulation 14L also admits transactions involving the acquisition and disposal of loans and other debts giving rise to interest, foreign exchange gains/losses or discount; including, for example, the acquisition of a stream of ‘consumer debt’ receivables (for example in relation to credit cards), a portfolio of distressed debt, or a non-performing loan. Transactions in convertible debt are also within regulation 14L.

Where fees are receivable by a diversely owned AIF as a direct incidence of that AIF becoming party to a loan relationship or related transaction, those fees derive from an ‘investment transaction’ within regulation 14L. This includes commitment, placement and documentation fees where the diversely owned AIF becomes party to a loan relationship by making a loan or placing the diversely owned AIF’s own money. Where consent or amendment fees are receivable by the diversely owned AIF in connection with the amendment of the terms of a loan relationship (for example a bond or loan) to which the diversely owned AIF is a party as creditor or debtor, such fees will also derive from an ‘investment transaction’ within regulation 14L where the amendment of terms constitutes a related transaction within regulation 14L(9).