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HMRC internal manual

International Manual

UK residents with foreign income or gains: corporation tax: Loan relationships: apportionment of DTR

A company may dispose of or acquire a loan relationship between the dates on which interest is payable; and it may or may not be entitled to receive the next payment of interest when it falls due.

TIOPA10/S108 lays down a general rule which applies to trading and non-trading loan relationships alike and irrespective of whether relief for foreign tax is given on an accruals or on a due and payable basis (INTM167180). No credit relief may be claimed, and no deduction may be made under TIOPA10/S112, for so much of any foreign tax paid on a receipt of interest as is attributable on a just and reasonable apportionment to the interest which accrued at a time when the company was not a party to the loan relationship in question. See below for stock loan and repo transactions.


A security on which interest of 100 is paid every 30 June is sold by company A to company B on 31 December. The next instalment of interest 100 is paid to company B on the following 30 June under deduction of foreign tax at 10 per cent. Company A and Company B each bring interest of 50 into account. The credit relief claimed by company B, or the Section 112 deduction that is allowed to it, should be restricted to foreign tax of 10 x 6 months/12 months = 5.

Company A is taxable on an amount of interest (50) in respect of which foreign tax has been paid, even if the foreign tax was suffered by company B when it received the interest payment in full. Company A is entitled to claim credit relief, or to have the benefit of a deduction for foreign tax under TIOPA10/S112, and the relief will in either case be restricted to foreign tax of 10 x 6 months/12 months = 5.

However, company A may not be able in practice to make a claim or to have a deduction for foreign tax if it does not know and cannot demonstrate that foreign tax was paid on the interest and the amount of the tax. By the time the interest is paid the security may be held by a person who is entitled to gross payment of the interest, for example a company resident in the country from where the interest is paid or in a country which has a double taxation agreement with the country from where the interest is paid which provides for interest to be taxable only in the country where the recipient is resident.

Where a company repos or loans a security (within the meaning of CTA09/S332) it strictly speaking ceases to be a party to the loan relationship. For the purposes of TIOPA10/S108(2), however, it should be treated as if it had continued to be a party to the relationship throughout the duration of the repo or loan so that no restriction under that Section will be made.