Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
, see all updates

Loan relationships: connected parties: late interest: participation

Connection through participation in a close company

Under CTA09/S375 there is a connection where the borrower is a close company (unless certain conditions apply), and the lender is either

  • a participator in the debtor company or (on or after 4 March 2005) a person who controls a company which is a participator in the debtor company, or
  • the associate (CFM35880) of a participator or (on or after 4 March 2005) of a person who controls a company which is a participator in the debtor company, or
  • a company controlled by the participator or (on or after 4 March 2005) by a person who controls a company which is a participator in the debtor company, or
  • a company in which the participator has a major interest (see CFM35920).

But there is an exemption where either the ‘CIS-based close company conditions’ (CFM35890) or the ‘CIS limited partnership conditions’ (CFM35900) are met.

Definition of participator

The definition of participator follows that used in CTA10/S454, and is a person (individual or company) who has a share or interest in the capital or income of that company. It includes

  • any person who possesses, or is entitled to acquire, share capital or voting rights in the company
  • any loan creditor of the company (however, a person is not a participator for the purposes of CTA09/S375 if they are only a loan creditor, having no other rights or interest)
  • any person who possesses, or is entitled to acquire the right to shares in company distributions, including premiums payable to loan creditors on redemption
  • any person who possesses, or is entitled to acquire the right to secure that the company’s income or assets (present or future) will be applied directly or indirectly for his or her benefit.

For interest accruing on or after 9 April 2003, a person who is a participator in a company which controls another company will be treated as a participator in that other company for the purposes of the late interest rules (FA03/SCH37/PARA2).

Example 1

Kit Gerrard lends £500,000 to PK Ltd, a close company. Kit owns no shares or other rights in the company. Kit is not a participator in PK Ltd under CTA09/S375 and is not connected.

Example 2

Kit Gerrard lends £500,000 to PJ Ltd, a close company. Kit owns one ordinary share of the 3,000 issued. Kit is a participator in PJ Ltd under CTA09/S375 and is connected.

Example 3

Kit Gerrard lends £500,000 to XY Ltd, a wholly owned subsidiary of another company, PJ Ltd. Kit owns one ordinary share of the 3,000 issued in PJ Ltd. Kit is a participator in XY Ltd (from 9 April 2003) and is connected whether or not PJ Ltd is close.