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HMRC internal manual

Corporate Finance Manual

Loan relationships: special types of security: deeply discounted securities: connected companies and close companies: introduction


A company issuing securities at a discount, or repayable at a premium, accounts for the debits as they accrue, not when they are paid. However, this treatment could lead to a mismatch where

  • the issuing company accrues the discount over the life of the loan, and
  • the recipient, if outside the corporate debt legislation, is not taxed until the discount is received, if at all.

Connected parties could arrange their affairs to take advantage of this mismatch. For this reason, the provisions in CTA09/S406 to S412 defer relief for the issuer of the discounted securities (the debtor company), in certain situations, until the issuer pays the discount on redemption. The rules are similar in application to the restriction on the deduction of late paid interest between connected persons in CTA09/PT5/CH8 explained in CFM35800.

The rules apply in two cases.

Where deeply discounted securities are issued between connected companies

CTA09/S407 and S408 operate where the debtor (the issuer) and the creditor are connected companies, and the creditor is not within the loan relationships rules. CFM37230 has more details.

Where deeply discounted securities are issued by close companies

CTA09/S409 to S411 operate where the debtor company (the issuer) is close, and the creditor is a company or an individual and is connected with the debtor in certain ways. CFM37260 has more details.

Lenders outside loan relationships

Broadly speaking the rule applies in similar circumstances to the ‘late interest rule’, where the lender is outside the loan relationships rules. Note, however, that for accounting periods beginning on or after 1 April 2009, as wit the late interest rule, there is a significant change to the scope of the rule as it affects cases where the creditor is a company. See CFM37320.