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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: modifications to certain tax rules: loan relationships

Loan relationships

The tax rules on loan relationships and derivative contracts at CTA09/PT5 to PT7 apply to companies outside the securitisation regime that have transactions with a securitisation company.

Loan relationship debits on late interest and deeply discounted securities

CTA09/PT5/CH8 modifies the normal loan relationships rules, where there is a loan relationship between connected companies, and interest is paid more than 12 months after the end of the accounting period in which it accrues in the accounts of the debtor and is not brought into account by the creditor. In such a case, loan relationship debits are allowable when the interest is paid rather than when it accrues. Regulation 19(1) has the effect that the payer is not denied a loan relationship debit just because the recipient is a securitisation company which does not bring the credit into account under the normal loan relationship rules.

CTA09/PT5/CH12 has a similar effect in respect of deeply discounted securities, and are similarly disapplied.

Intra-group transfers of loan relationships

CTA09/PT5/CH4 provides for continuity of treatment where loan relationships are transferred between companies in the same group. The normal rule is that the transferee company takes over the loan relationship at the ‘notional carrying value’ at which the transferor company held it immediately before transfer. Notional carrying value here means the value at which no gain or loss arises on the transferor, essentially the book value, subject to certain tax adjustments.

While CTA09/PT5/CH5 prevents manipulation of the value of a loan relationship held between connected parties, in cases where third party debt is transferred to a securitisation company in the same group, the effect of Chapter 4 would be that any subsequent change in the value of the loan relationship after transfer to the securitisation company would not be reflected in the tax charge on that company.

Regulation 19(2) therefore disapplies CTA09/PT5/CH4, so that the transferor company is taxed in the same way as if the disposal was to an independent third party. If the loan relationship becomes impaired, there will be no relief in the securitisation company but that company’s reduced receipts will be reflected in a lower return to the originator.

Exit charge on loan relationships

CTA09/S344 to S346 apply where CTA09/PT5/CH4 applies. This is an anti-avoidance provision under which, where a company to which a loan relationship is transferred is itself sold out of the group, an exit charge crystallises in the company on the difference between the notional carrying value and the fair value. As a consequence of the disapplication of Chapter 4, there will be no such exit charge on a securitisation company to which an asset is transferred after the commencement of the securitisation regime on 1 January 2007. As the loan relationship will not have been transferred at notional carrying value, any subsequent change in ownership of the securitisation vehicle does not run the risk of any later loss of tax on the loan relationship.

However, where a loan relationship was transferred intra-group under Chapter 4 to a securitisation company before the commencement of the securitisation regime, and the securitisation company is later sold out of the group, Regulation 14(3) ensures that the normal S344 charge is brought in, by adding it to the tax charge under Regulation 14.