CFM35940 - Loan relationships: connected parties: late interest: major interest and participation: example

Application of late interest rule: more than one type of connection

The late interest rule may apply to a debtor which is connected to a lender under more than one of the cases in CTA09/PT5/CH8

Example

Partners Mrs A, B Ltd and C Ltd have interest in the ABC partnership. The profit sharing arrangements are:

Mrs A 10%

B Ltd 41%

C Ltd 49%

ABC partnership owns 100% of the share capital of D Ltd.

ABC partnership lends £100,000 to D Ltd.

Interest is payable at the rate of 10% per annum.

D Ltd fails to pay interest on the due and payable date. The delay continues for more than 12 months after the end of its accounting period.

Neither B Ltd nor C Ltd controls D Ltd. S372 cannot apply.

Participation

D Ltd is a close company as it is controlled by five or fewer participators. The participators are Mrs A, B Ltd and C Ltd. S375 applies. The partnership is not a collective investment scheme so there is no exclusion.

Major interest

Both B Ltd and C Ltd have a major interest in D Ltd. This is because both parties separately could influence D Ltd as each is treated as holding more than 40% of the rights and powers. S377 applies.

If the full amount of interest is not brought into account, the debits are restricted.

B Ltd and C Ltd are UK corporates and will be bringing into account the interest under CTA09. Interest on the proportion of the loan that relates to B Ltd and C Ltd will therefore not come within CTA09/PT5/CH8. However, Mrs A will not be bringing into account the interest under CTA09. Interest on the proportion of the loan that relates to Mrs A will therefore come within CTA09/PT5/CH8.

D Ltd will treat the loan of £100,000 as being three separate loans:

  • £10,000 from Mrs A
  • £41,000 from B Ltd
  • £49,000 from C Ltd

D Ltd will treat interest of £1,000 as being appropriate to the loan from Mrs A. CTA09/PT5/CH8 will therefore restrict the interest debit by £1,000 until D Ltd actually pays the interest.