Deemed loan relationships: holdings in investment funds: example of the purpose of the legislation
Example of investment via a unit trust
At the start of Year 1 ABC Ltd acquires a corporate bond for £100m. No interest is payable on the bond but it will be redeemed at the end of Year 5 for £120m.
At the end of Year 1 ABC Ltd will include in its accounts say £4m premium accrued and will be taxed on this amount under the loan relationships legislation.
Alternatively, instead of acquiring the bond directly, ABC Ltd might subscribe £100m for units in Z Unit Trust. Z uses this amount to acquire the same corporate bond. Z, being a financial concern, may fair value the asset rather than accrue the premium. The value of the units will accordingly have increased to, say £104m at the end of Year 1.
In the accounts of ABC Ltd the units in Z are an investment to be valued at the lesser of cost and net realisable value. ABC Ltd will be chargeable to tax on the premium only when the units are sold. The disposal will also fall under the chargeable gains regime, with indexation allowance if appropriate, rather than the loan relationships regime.
If the £100m bond accounted for (say) 75% of the total market value of Z Unit Trust’s assets, then ABC Ltd will be required to treat its holding as a loan creditor relationship and to fair value it. CTA09/PT6/CH3 ensures that ABC Ltd cannot avoid bringing a sum into charge by interposing an investment in an OEIC, unit trust or offshore fund between itself and its holding of the debt assets.