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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: structured finance: connected persons

The meaning of ‘person connected with lender’ in a simple case

The aim of the rules is to catch transactions that are in economic substance secured borrowings whereby the security effectively repays the borrowing plus interest to the lender. But, to prevent avoidance in group contexts, the rules are extended to cases where the security in question is supplied by a person connected with the borrower, and where the repayment of the loan is to a person connected with the lender.

But to ensure that this rule is not triggered in inappropriate cases, section 758(5) ensures that references to a person connected with the lender or borrower do not include the borrower or lender respectively. This means that the section and section 759 cannot be triggered accidentally just because lender and borrower are connected.


Borrower (B) and Lender (L) are connected. L sells an income-producing asset to B for deferred consideration. As a result, B receives an asset (the income producing asset) and records a financial liability in respect of that asset (the deferred consideration). Moreover, someone connected with L (B) becomes entitled to payments in respect of the security, while someone connected with B (L) makes a disposal of an asset to a person connected with L (B). Hence, without more, section 758 might apply.

Section 758(5) makes clear that for the purposes of section 758 references to persons connected to L and B do not include B and L. Hence section 758 cannot apply in the above example. In this example, section 758 would not apply anyway because the payments B receives in respect of the security do not have the effect of reducing the amount of the amount of the financial liability owed by B to L.