Loan relationships: a short guide: the meaning of ‘loan relationship’
What are loan relationships?
The key definition of a loan relationship is that it is a
- money debt
- arising from a transaction for the lending of money
Both elements have to be present for the arrangement to be a loan relationship.
Neither part of the definition is itself defined in the legislation, although ‘loan’ is said to include ‘any advance of money’. Broadly, whether something is a ‘debt’ and involves the ‘lending of money’ will be determined by case law.
A loan involves repayment
Central to the idea of a ‘loan’ is that it involves one person (the creditor) agreeing to lend money to another (the debtor) in consideration of promise to repay that sum, on demand or at some future point, or on condition of some event happening. A loan usually, but not necessarily involves the payment of interest or an interest-like return by the debtor. The obligation to repay is central to the idea of a debt. A grant or subsidy is not debt. Difficulties can arise where repayment is contingent on something happening. See CFM31030.
A guarantee to repay someone else’s debt is not lending money.
Debt and equity are different (see CFM11000). Some debt can be converted into shares, and some debt is issued on terms that provide a return that is similar to a return from shares. So there are special rules for such convertible and index-linked debt.
Extended definition of loan relationships
There are two important extensions to this definition.
- First, some money debts that do not involve the lending of money are within the loan relationships rules. The best example of this is that of interest arising on a trade debt. See CFM30200.
- Second, securities are brought within the rules by CTA09/S303(3) which extends the meaning of the ‘lending of money’ to cases where there is no actual lending of money, but an ‘instrument issued… for the purposes of representing security’ for a money debt. For example, a company may buy an asset (such as shares in another company) by issuing a ‘loan note’. There has been no lending of money, but the loan note is a loan relationship.
So ‘loan relationship’ is wide term that encompasses a wide range of financial arrangements, from simple debt such as an overdraft, to complex financial instruments.