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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: tax avoidance: forex: non-arm’s length transactions: non-arm’s length creditor relationships: exception where loan exceeds arm’s length amount

Exception where loan exceeds an arm’s length amount

CTA09/S451 disapplies S449 where a company has made a bigger loan than it would have made at arm’s length, exchange gains and losses are recognised in full,

  • a loan differs from the arm’s length standard only because it is not at a market rate of interest, or
  • exchange gains and losses on the corresponding debtor relationship are within the Corporation Tax charge (CFM33010).

In such cases exchange gains and losses on the loan are recognised in full, except where there is no corresponding debtor relationship within the meaning of CTA09/S450. In such a case you bring in for tax purposes those exchange gains and losses referable to the arm’s length portion of the loan.


Rykmint plc makes a loan of Canadian $6 million to a wholly-owned Canadian subsidiary. It is agreed that, at arm’s length, the company would have lent only Canadian $2 million.

In the accounting period to 31 December 2004, an exchange loss of £300,000 arises on the Canadian dollar loan. Only the exchange loss arising on the adjusted amount of Canadian $2 million, £100,000, is allowable for tax purposes. The excess portion of £200,000 is disregarded.

In the year to 31 December 2005, an exchange gain of £150,000 arises on the loan. Two-thirds of this exchange gain is similarly disregarded, so that only £50,000 is taxable.