Deemed loan relationships: shares with guaranteed returns: meaning of commercial rate of interest
Commercial rate of interest
This guidance applies to companies that hold shares up to 21 April 2009
All the rules in CTA09/SPT6/CH7 define an interest-like return in terms of ‘return on an investment of money at a commercial rate of interest’. A definition of ‘commercial rate of interest’ was inserted by F(2)A05/SCH7/PARA13 as new FA96/S103(3A). Note, however, that FA96/S103(3A) was repealed by FA08/SCH22/PARA19(1) in relation to times on or after 12 March 2008.
The section provides that for the purposes of loan relationships, a commercial rate of interest, in the case of a company and any asset, is:
- a rate (‘the simple commercial rate’) that is reasonably comparable to the rate that the company could obtain by placing on deposit the money it invested in the asset, or
in any case where -
- the likely rate of increase in the value of an asset is in question, and
- that likely rate is lower than the simple commercial rate, and
- the difference is a result of an expectation that the company would also obtain a tax advantage as a result of investing in the asset,
- that lower rate.
For these purposes, a ‘tax advantage’ has the meaning given by ICTA88/S709 (1).