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HMRC internal manual

Corporate Finance Manual

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

Conditions for exemption: debt

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

The conditions relating to the debt were:

  • it had to be listed on a recognised stock exchange, or be a security redeemable within 12 months of issue
  • similar debt assets must have been held by third parties
  • there had to be no more than three months, in aggregate, in the accounting period during which more than 30% of similar debt assets were held by connected persons.

These tests identified whether the debt was truly a marketed security, so that non-connected companies might buy the debt.

Listing on the Stock Exchange shows that the debt is available for other financial traders or the public to buy. And debt that lasts for less than a year is unlikely to be held as an investment.

The second condition ensures that others held that kind of debt issued on similar terms and conditions. FA96/S88(4)(a) stated that assets were taken as the same kind where they are

  • treated as being of the same kind by a recognised stock exchange, or
  • would be so treated if listed.

For example, if Williams Ltd, a securities trader, held bonds issued by its parent, it was enough that equivalent bonds were issued and either

  • listed on the stock exchange, or
  • traded in the same period.

A 70% holding by others also indicated that the debt was traded commercially, rather than held because of, and for the advantage of, the connection. The ‘three month condition’ was designed to take account of commercial reality - a company may place the whole of a bond issue with an associated securities dealer who will place the bonds with unconnected parties over the next few weeks.


PF Bank Ltd issued bonds with a face value of £5m. The bonds were listed securities and were placed with its subsidiary, PF Securities Ltd, who was handling the placement of bonds with unconnected investors. It held the bonds for 2 months while finding buyers.

PF Bank Ltd was a bank. PF Securities Ltd was a securities trader - its trade was buying and selling securities. PF Securities Ltd would have drawn up its accounts on a mark to market basis, and the bonds would have been part of its trading stock.

The parties were connected under FA96/S87, so without the FA96/S88 exemption PF Securities Ltd would have had to account for the bonds using the accruals method. However, this was an ordinary commercial arrangement, with PF Securities Ltd buying and selling the bonds as part of its trade.

Applying FA96/S88, PF Securities Ltd could continue to account for the debt as trading stock.

PF Bank Ltd, the debtor company was not exempted by S88 and would therefore have used the authorised accruals basis when accounting for the securities.