Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
, see all updates

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

DDS and close companies: effect of CTA09/S409: apportionment examples

Example 1

Aldrow Ltd, a close company, issues loan notes with a face value of £12,000 to Mr Aldrow. The issue price is £10,000 and the notes will redeem in 5 years’ time. Mr Aldrow is the majority shareholder in Aldrow Ltd. He sells the loan notes half way through Year 3 to an unconnected party, Mrs Kuzuou.

  • Aldrow Ltd is a close company.
  • The security is a relevant discounted security.
  • Mr Aldrow is a participator in Aldrow Ltd.
  • Mrs Kuzuou is not a participator in Aldrow Ltd. She is a ‘person’ and not a company.

The debits for the discount in the accounts of Aldrow Ltd in Years 1 and 2 will be excluded in the computation. These debits will be brought into account in the AP in which the notes redeem. The debits in the accounts of Aldrow Ltd for Year 3 will be time apportioned so that half are excluded in the computation. These excluded debits will be brought into account in the accounting period in which the notes redeem.

Example 2

Midford Ltd, a close company, issues loan notes with a face value of £12,000 to Bilkot Ltd, its UK parent company. Bilkot Ltd owns 99% of the shares in Midford Ltd. The issue price is £10,000 and the notes will redeem in 5 years’ time. Bilkot Ltd sells the loan notes half way through Year 3 to Cardew NV, a non-UK company resident in a ‘non-qualifying terrritory’ (CFM37320) that holds 1% of the shares in Midford Ltd.

  • Midford Ltd is a close company.
  • The security is a relevant discounted security.
  • Bilkot Ltd is a participator in Midford Ltd.
  • Bilkot will be bringing into account the discount for tax purposes under the loan relationships legislation.
  • Bilkot Ltd is connected to Midford Ltd
  • Cardew NV is a participator in Midford Ltd but is not connected to Midford Ltd or Bilkot Ltd.
  • Cardew NV will not be bringing into account the discount in accordance with the loan relationships rules.

The debits for the discount in the accounts of Midford Ltd in Years 1 and 2 will be allowed in the computation because Bilkot Ltd brings the credits into account under the loan relationships legislation. The debits in the accounts of Midford Ltd for Year 3 will be time apportioned so that half are excluded in the computation. This is because Cardew NV

  • is a participator in Midford Ltd, and
  • does not bring the credits into account under the loan relationships legislation.

The excluded debits will be brought into account in the accounting period in which the notes redeem.