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HMRC internal manual

Corporate Finance Manual

Interest restriction: related parties: liabilities guaranteed by a related party

TIOPA10/S466

Where an entity borrows from a third party, it may still be able borrow excessively - more than it could on its own - by obtaining a guarantee from a related party. In determining whether a loan or other financial liability is treated as being with a related party, consideration must therefore be given to any guarantees, indemnities or other financial assistance provided to the lender in respect of the liability by a related party.

In particular, the rules treat a loan or other financial liability of an entity (D) as if were with a related party where a related party to D (G) provides a guarantee, indemnity or other financial assistance for the debt owed by D.

Example

A third party (C) lends £100m to a company (D). A company (G) which is related to D provides a guarantee in respect of the liability.

Without the guarantee, the loan between C and D would not be between related parties. However, providing a guarantee will mean that C and D will now be treated as if they were related parties in respect of the £100m loan relationship.

Exclusions

There are a number of specific exclusions to this rule in the context of the group ratio method and the public infrastructure rules.

Group ratio method

This rule is turned off by section 415 in the calculation of qualifying net group-interest expense for the group ratio method where the financial assistance:

  • existed before 1 April 2017,
  • is provided by another member of the group,
  • simply pledges shares in the ultimate parent or loans to a member of the group, or
  • is a performance guarantee.

Public infrastructure

Section 438 sets out the amounts of interest, and similar financial expenses, which are excluded from tax-interest expense for a public infrastructure company. Section 438(3) provides that this exemption cannot apply where the creditor is a related party but disapplies section 466 in this specific instance. This means that the exemption can potentially apply to interest, or similar financial expenses, paid to a creditor who is only a related party by virtue of section 466.