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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Loan relationships: connected parties: late interest: pension schemes

Connection through a pension scheme

There is a connection under CTA09/S378 where the lender is the trustee of a retirement scheme and the borrowing company

  • employs scheme employees, or
  • is connected (under CTA09/S466) to a company that employs scheme employees, or
  • has a major interest in a company that employs scheme employees, and vice versa.

This rule prevents companies from borrowing from their pension schemes and getting relief for interest that they don’t pay.

Example 1

AD Ltd has a pension scheme for its employees. The trustee of the pension scheme is Mr Brown, who is also a shareholder in AD Ltd. The pension scheme holds no shares in AD Ltd. AD Ltd borrows £100,000 from the pension scheme.

In his capacity as trustee, Mr Brown is a creditor but not a participator or the holder of a majority interest, so CTA09/S374 to S377 do not apply.

As a shareholder, Mr Brown will be a participator if the company is close, but he is not a creditor, so again CTA09/S374 to S377 do not apply.

However, CTA09/S378 applies - AD Ltd employs people to whom the pension scheme relates - the pension scheme is for the employees of AD Ltd. So if AD Ltd still owes interest to the scheme more than 12 months after the end of the accounting period in which it would be treated as accruing, then the unpaid amount cannot be brought in as a debit in that accounting period.

Example 2

BG Ltd is a subsidiary of AQ Ltd. BG Ltd has a pension scheme for its employees. The trustee of the pension scheme is Ms Collins, who also holds shares in AQ Ltd. The pension scheme holds no shares in AQ Ltd. AQ Ltd borrows £100,000 from the BG Ltd pension scheme.

AQ Ltd is the debtor, and the creditor is Ms Collins, in her capacity as trustee.

In her personal capacity, Ms Collins is a shareholder but not a creditor. As a trustee, she is a creditor but not a shareholder. However, CTA09/S378 applies because there is a CTA09/S466 connection between the debtor company, AQ Ltd, and the pension scheme employer, BG Ltd. AQ Ltd controls BG Ltd. Any interest remaining unpaid more than 12 months after the end of the AP is disallowed until the period in which it is paid.