CFM96271 - Interest restriction: related parties: financial assistance

TIOPA10/S415(2)(c)(ii) and S466

When considering whether S415(2)(c)(ii) can act to prevent a third-party lender from being treated as a related party under S466, it is necessary to understand the nature of any financial assistance.

The rules are designed to distinguish between a situation where only the assets of the CIR group are supporting the debt, and a situation where a related party is using assets outside of the CIR group to support the debt. The legislation refers to “an undertaking”, which is not defined but could include the following scenarios.

Example 1

A Ltd, a company in a CIR group, obtains a loan from B (the B loan). B is a related party but not in the same CIR group as A Ltd.

Subsequently, A Ltd applies for a loan from C, an unrelated party. In order to provide C with sufficient security, B pledges the B loan receivable asset to C in the event of a default by A Ltd. If, therefore, A Ltd were to default on the loan repayments to C, C would be entitled to take ownership of the B loan receivable asset but no other assets, and therefore S415(2)(c)(ii) applies.

Example 2

D Ltd, a company in a CIR group, obtains a loan from E (the E loan). E is an unrelated party.

G, a related party of D Ltd but not in the same CIR group, provides a guarantee for the loan. S415(2)(c)(ii) does not apply because the guarantee makes G’s entire assets available to E in the event of the E loan default by D Ltd. The guarantee means that D Ltd could borrow more than the assets of the CIR group could support. Therefore, S466 applies, and E is treated as a related party of D Ltd in relation to the E loan.

Series of security arrangements

More than one type of security may be provided in relation to a loan. For example, a related party may make a pledge over a loan to the CIR group (as in example 1 above), but the creditor may also require a guarantee.

It may be appropriate to assess a series of security arrangements as a whole package when considering whether they are in relation to a loan to the CIR group. If, on the specific facts, a series of security arrangements are in place in relation to a loan to the CIR group, but these are not allowing the CIR group to borrow excessively from third parties, then S415(2)(c)(ii) may apply.

In considering such cases, HMRC takes a similar approach to that set out in the public infrastructure rules when considering whether assets or income are “insignificant” (CFM97200).

Example 3

The scenario is the same as for example 1, but in addition to the pledge of the B loan receivable asset, C also requires a guarantee from B. B’s balance sheet shows that its main asset is the B loan receivable from A Ltd. B also has a small cash asset, but that is insignificant relative to the B loan receivable amount. Therefore, the guarantee does not offer any additional substantive protection over and above the pledge of the B loan receivable asset. The pledge and guarantee are considered together for the purposes of S415(2)(c)(ii), which applies, so that C is not treated as a related party.