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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected companies: what is control: financial trader exemption

Shares held by financial traders are excluded in determining control

CTA09/S469 exempts creditors who are financial traders from being treated as connected. Such companies do not therefore apply the amortised cost or follow the other provisions that apply to connected persons. This exclusion applies mostly to securities dealers, banks and financial traders that hold shares as trading stock, and exists to avoid penalising a company that is genuinely dealing in debt, even though it is connected to the other party to the debt. For example a company dealing in securities may also be a subsidiary of a bank. It could deal in the bank’s loan notes in exactly the same way as it deals with loan notes of other companies. Similarly it stops share underwriters, say, from becoming connected where they obtain a lot of shares in a company in the course of their trade, perhaps before a public offering.

The exclusion complements the group relief provisions in CTA10/S151 which disregard shares held on trading account when establishing whether a company is part of a group for group relief purposes - see CTM80150. If the company can’t claim group relief because its shares are held on trading account, it is reasonable to allow impairment relief where connection is only established by taking those shares into account.

It is quite possible for a company trading in debt to lend money to a connected person for, say, investment purposes. You need to look at the reason for the loan, as well as the nature of the debt, which might well have a different character from loan notes, or securities held as trading stock.

CFM35140 has more on the financial trader exemption.

Life assurance business

A similar exclusion applies for creditors who are insurance companies carrying on basic life assurance and general annuity business. See the Life Assurance Manual.

The debtor remains ‘connected’ for tax purposes

The exclusion for shares held by financial traders only applies to the creditor company. The debtor company is treated as subject to control by the creditor and thus connected, and the rules requiring connected companies to use amortised cost basis therefore apply to it.