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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: disguised interest: overview

Disguised interest: overview

The ‘shares as debt’ rules at CTA09/PT6/CH7 (CFM45000) were introduced in response to disclosures made under the disclosure of tax avoidance schemes rules introduced in FA 2004. These disclosures confirmed the existence of a variety of schemes designed to produce what is economically an interest-like return but in a form which is for tax purposes either a capital gain or a tax nothing. The rules seek to identify the features of the avoidance schemes that they were intended to deal with and would bring the interest-like return into charge as though it were a return from a loan relationship.

While the ‘shares as debt’ rules worked well in stopping the avoidance that they were brought in to deal with, they were vulnerable to new schemes specifically designed to bypass the legislation and have needed to be updated, resulting in increasingly complex and unwieldy legislation that still failed to deal comprehensively with the underlying avoidance.

The disguised interest legislation in CTA09/PT6/CH2A takes a different approach to dealing with such avoidance. It seeks to ensure that an interest-like return is charged to corporation tax in all circumstances where it is obtained from a transaction (or transactions) that is not a loan or treated as a loan, and consequently not taxed as income and is either a tax nothing or a capital return. The legislation ensures that such arrangements are taxed as though the interest-like return arises from a loan relationship and consequently will be taxed under the loan relationship rules.

The legislation sets out a comprehensive principle that a company that is party to an arrangement that produces a return economically equivalent to interest is to be charged to corporation tax on the return as if it were a profit from a loan relationship. The legislation then deliberately excludes certain types of arrangement which for good policy reasons should not be treated in this way.

CFM42020 set out the provisions that were repealed as a consequence of the introduction of the disguised interest rules.


Company A purchases an asset (that is not a security) for £100m from Company B under an arrangement whereby Company A will sell that asset back to Company B in two years’ time for £112M.

Assuming that the return of 6% per annum (straight line) is reasonably comparable to a commercial rate of interest, then this transaction provides an interest-like return in a manner that would not, without any special rules, be taxed as interest.

Further examples can be found at CFM45020.