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HMRC internal manual

Corporate Finance Manual

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

DDS and close companies: conditions for CTA09/S409 to apply

CTA09/S408 applies to close companies where the following certain conditions are met:

  • the close company issues a deeply discounted security;
  • another person stands in the position of creditor for that security;
  • that person is a participator in the close company in one of various ways (CFM37270)
  • the creditor is not a CIS limited partnership or the close company is not a CIS-based close company and certain conditions are met.

Where these conditions are satisfied, the discount is brought into account when the security is redeemed, not when it accrues, unless the full amount of the credit is brought in (subject to the exemptions explained below).

CTA09/S409 covers situations where the creditor is a person, unlike CTA09/S407 which refers only to creditors that are companies. Person’ can include individuals and trustees, as well as companies.

Exemption where the creditor is taxable on discounts

Even if the above conditions are met, CTA09/S409 won’t apply, and the issuing company can have a deduction for the discount accrued, where

  • the security is held by a company (as opposed to an individual) throughout the period, and
  • the creditor company brings the full amount of the discount into account under the loan relationships provisions,
  • even if it subsequently gets relief for impairment losses (or, for accounting periods beginning before 1 January 2005, bad debt relief).

For accounting periods beginning on or after 1 April 2009 S409 applies to a creditor that is a company only where the creditor is resident in a non-qualifying territory (CFM37320).

Exemption for CIS-based close companies

The exemption for CIS-based close companies is the same as that which applies for the purposes of the late interest rule - see CFM35890.