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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: alternative finance: diminishing shared ownership arrangements: tax treatment

Diminishing shared ownership arrangement: calculation of alternative finance return

CTA09/S512 sets out how the alternative finance return in a diminishing shared ownership is calculated. It is the amount paid by the eventual owner to the financial institution in excess of the amount paid by the financial institution for its beneficial interest. However, payments made to the financial institution in respect of arrangement fees, legal or other costs are excluded when calculating the amount of the return paid.

In the most likely scenario the eventual owner will make a series of payments to the financial institution. Where the arrangements set out clearly the allocation of income and capital, this should be followed for tax purposes. For example, where the eventual owner makes a series of monthly payments of £120, and it is clearly set out that each payment represents a capital payment of £100 and an income payment of £20 the respective amounts will also be used tax purposes.

However, where the arrangements do not provide for the allocation of income and capital, the alternative finance return is to be calculated as the amount of each instalment which is not treated as reducing the financial institution’s ownership of the asset.

Example of diminishing shared ownership arrangement

A Ltd wishes to purchase an asset at a cost of £110,000. A Ltd enters into a diminishing shared ownership with L Plc (a financial institution); A Ltd contributes £10,000 to the capital cost of the asset with L Plc contributing £100,000. A Ltd also pays a £500 arrangement fee to L Plc. A Ltd makes 200 monthly payments of £500 to L Plc to acquire L Plc’s beneficial interest in the asset - acquiring L Plc’s interest through those payments. In addition to the 200 monthly payments of £500, A Ltd makes an additional monthly payment of £300 each month representing the equivalent of an interest payment on a regular loan.

The arrangement will be treated as an alternative finance arrangement if A Ltd has exclusive rights to the benefit of the assets and to any other benefit from the asset, including any increase in its value.

The monthly payment of £300 will be treated as the alternative finance return and taxed accordingly. The arrangement fee of £500 will not be treated as an alternative finance return but will be subject to the usual loan relationship rules for expenses (CFM33060).

If instead of separating out the payments between capital and income the arrangement simply referred to single monthly payment of £800, the alternative finance return is determined by reference to the amount of the instalment that is treated as reducing the financial institution’s ownership of the asset. Any amount of the payment that is not taken as reducing the financial institution’s beneficial ownership of the asset will be treated as the alternative finance return. This breakdown will normally be reflected in the accounts of the company.