Interest restriction: related parties: holdings of debt and equity in the same proportions
The related party rules exist to limit the scope for a related party outside the group using loans and other instruments in place of equity to inflate the interest capacity of the group through the group ratio method or the public infrastructure rules.
A specific risk exists where shareholders in a company lend money on the exact (or very similar) terms and in proportion to their shareholdings in the company. Often such loans are referred to as ‘shareholder loans’ or ‘equity loans’. In such cases loans effectively form part of the equity in the company.
So where the amounts each lender has lent to a company U stand in substantially the same proportion as their shares or voting power, and the lenders together have a 25% investment in U, the loans are treated as made between related parties.
In addition, a lender might transfer some, or all, of the rights under the loan to another person. Where this is the case, that person (the transferee) is treated as a related party of U in relation to the loan, even where they have no shares or voting power in U.