CFM37210 - Loan relationships: special types of security: deeply discounted securities: connected companies and close companies: introduction

CTA09/S406-S412

Overview

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 were substantially revised by FA15 to limit the categories in which the provisions apply.

The current rules apply in a single category of cases where the debtor company is a close company and the creditor is a participator (or similar) in the debtor company. Previously, the rules also applied in cases where the creditor and debtor companies are connected through control or a major interest.

Detail

(1) Where deeply discounted securities are issued between connected companies (removed by FA15)

S407 and S408 operate where the debtor (the issuer) and the creditor (the holder) are connected companies by virtue of control or a major interest.

CFM37230 has more details.

FA15 removed S407 and S408 for debtor relationships entered into on or after 3 December 2014, and from 1 January 2016 for instruments issued before 3 December 2014.

(2) Where deeply discounted securities are issued by close companies

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.

FA15 has not removed this section, so it continues to have effect.

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. The rules do not apply where the lender is a UK resident company and is within the scope of the loan relationship rules.

Note, however, that for accounting periods beginning on or after 1 April 2009, as with the late interest rule, there is a significant change to the scope of the rules. So where the lender is a company, the rules only apply where the creditor company is resident in a non-qualifying territory.

See CFM37320.

FA15 changes

For more detail on the changes made by FA15, see CFM.