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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: connected persons: conditions for exemption: company

Conditions for exemption

This guidance applies only to accounting periods starting before 1 January 2005 

The company had to:

  • buy and sell debt assets as an integral part of its trade, or, in the case of an insurance company, its basic life assurance and general annuity business
  • account for all of those debt assets on a mark to market basis
  • have bought that particular debt as part of its trade.

The three company tests were designed to ensure that the creditor company was genuinely dealing in debt, even though it was connected to the other party to the debt.

The first test was a question of fact. Was it an integral part of the company’s trade to buy and sell debt assets of this type? Insurance companies must be carrying on basic life assurance and general annuity business, as defined in ICTA88/S431(2).

The second test supported the first, as financial traders would usually have accounted for their assets using mark to market to reflect the fair value of their stock at the year end.

It is quite possible for a company trading in debt to lend money to a connected person for, say, investment purposes. You would have looked at the reason for the loan, as well as the nature of the debt, which might well have a different character from loan notes, or securities held as trading stock.

The tests which related to the debt are at CFM81060.