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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: structured finance: Condition B cases

The criteria for a Condition B complex case

The Condition B case is slightly different. It deals with cases where (unrelated to the financing arrangement) the partnership already holds an income-producing asset and existing members of the partnership are sharing in their normal ratio in the profits attributable to that asset. Then either:

  • a new member joins the partnership and takes a share in those profits in return for a capital contribution that is in substance a loan or
  • an existing partner takes an increased share in the profits in return for a capital contribution that is in substance a loan.

The partner’s share in the profits will be sufficient to repay its contribution with interest.

The Conditions are similar to Condition A and are:

  • the borrower partnership holds an asset (the security) prior to the arrangement being made
  • then the borrower partnership has to receive money or another asset which is called the advance, as in section 758, from another person called the lender.
  • the accounts of the borrower partnership have to record in accordance with GAAP a financial liability in respect of the advance. Section 763 makes it clear that any reference to the accounts of a borrower partnership (to see if the accounts record a financial liability) includes a reference to the accounts of the transferor partner. Section 774 (2) provides that references to the accounts of the transferor partner include a reference to the consolidated group accounts of which that person is a member.
  • there is a relevant change in relation to the membership of the partnership involving the lender (including a person connected with the lender). ‘Relevant change’ is defined by section 764 - see CFM73210.
  • the share of the lender in the profits of the borrower partnership falls to be determined (wholly or partly) by reference to payments in respect of the security.
  • in accordance with GAAP the payments reduce the amount of the financial liability.

The only difference as compared with Condition A is that instead of any reference to a transfer of an asset by a transferor partner there is a reference to the borrower partnership holding the security prior to the arrangement being made.

This arrangement would not be caught by section 758 (4) since the arrangement does not involve the disposal of any asset by a partnership.