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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: interest-like returns: summary

Arrangements that give an interest-like return

Certain financial arrangements provide a return that is economically equivalent to interest, but in legal form is not interest. The arrangements that are brought within the loan relationships rules by virtue of Part 6 are as follows.

Disguised interest

Legislation introduced in FA 2009 provides for interest-like returns from transactions that are not loan or treated as loans to be taxed under the loan relationships rules. This legislation is a successor to the shares as debt rules (see below). See CFM42000.

Alternative finance arrangements

Alternative finance arrangements are Shari’a-compliant financial arrangements that provide an interest-like return without paying interest, for example by means of the purchase and sale of commodities, or by profit-sharing. Where such arrangements provide a return that economically amounts to interest, CTA09/PT6/CH6 the loan relationships rules tax it as such. See CFM44000.

Shares with guaranteed returns, returns from partnerships, shares treated as liabilities

Certain shares and certain holdings in partnerships give a return that is very similar to the return from holding debt. The ‘shares as debt’ rules in CTA09/PT6/CH7 and partnership returns rules in CTA/PT6/CH8 bring these within the loan relationships rules. See CFM45000. These rules are superseded by the ‘disguised interest’ rules introduced by FA 2009 (see above), except for rules on ‘shares treated as liabilities’ which continue the effect of certain features of the ‘shares as debt rules’.

Manufactured interest and repos

Assets such as securities may be lent or transferred to another company under a ‘sale and repurchase’ (repo) arrangement, which equates in substance to making a loan to and receiving interest from the other company. CTA09/PT6/CH9 and CH10 bring these arrangements within the loan relationships rules. See CFM46000.

Investment life insurance contracts

Profits and gains from certain life insurance contracts held by companies are treated as deriving from a loan relationship by virtue of CTA09/PT6/CH11. CFM47000 gives an overview of this, and see the HMRC Insurance Policyholder Taxation Manual (IPTM) for full guidance.