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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: connected companies: what is control: financial trader exemption: conditions

Conditions for the financial trader exemption

The creditor company and the debt must satisfy five conditions for the same AP.

  • Condition A: the company must buy and sell debt assets as an integral part of its trade (or, in the case of an insurance company, its basic life assurance and general annuity business).
  • Condition B: the company must have bought that particular debt as part of its trade.
  • Condition C: the debt must be listed on a recognised stock exchange, or be a security redeemable within 12 months of issue
  • Condition D: similar debt assets must be held by third parties
  • Condition E: there must be no more than three months, in aggregate, in the accounting period during which more than 30% of similar debt assets are held by connected persons.

Conditions for exemption: the company

Condition A is a question of fact. Is it an integral part of the company’s trade to buy and sell debt assets of this type? Insurance companies must be carrying on basic life assurance and general annuity business, as defined in ICTA88/S413F. Condition B supports the first test.

Conditions for exemption: the debt

Condition C (listing on a recognised stock exchange) shows that the debt is available for other financial traders or the public to buy. And debt that lasts for less than a year is unlikely to be held as an investment.

Condition D: ensures that others hold that kind of debt issued on similar terms and conditions. CTA09/S468 states that assets are taken as the same kind where they are

  • treated as being of the same kind by a recognised stock exchange, or
  • would be so treated if listed.

For example, if Williams Ltd, a securities trader, holds bonds issued by its parent, it’s enough that equivalent bonds were issued and either listed on a stock exchange, or traded in the same period.

Condition E (a 70% holding by others) indicates that the debt is traded commercially, rather than held because of, and for the advantage of, the connection. The ‘three month condition’ is designed to take account of commercial reality - a company may place the whole of a bond issue with an associated securities dealer who will place the bonds with unconnected parties over the next few weeks.