CFM31075 - Loan relationships: related transactions

CTA09/S304

The scope of the loan relationships rules includes profits and losses from loan relationships and profit and losses from ‘related transactions’.

The term, related transaction, is widely defined in CTA09/S304(1), as

“any disposal or acquisition (in whole or in part) of rights or liabilities under the relationship”

This definition is needed because profits or losses on a disposal do not derive directly from the loan relationship itself, but result from the related transactions of sale or purchase.

Disposals and acquisitions of loan relationships

S304(2) expands on this and makes it clear that disposals and acquisitions include cases where rights or liabilities are

  • transferred, for example on sale, gift exchange or through novation
  • extinguished, for example on surrender, repayment or release.

Acquisition does not include setting up the loan relationship

Although the definition of a ‘related transaction is broad, it does not include the initial creation of a loan relationship. A company will acquire the rights under a loan relationship if, say, it buys a security on the market. Entering into a loan relationship, for example making a loan agreement, is not an ‘acquisition’. The lender has not acquired the rights under that loan relationship, but rather has brought the loan relationship into existence. A company can only acquire rights under a loan relationship if it already exists. Where loan relationships provisions refer to credits and debits from related transactions, this does not include the original setting up of the loan relationship.

Part disposals (and part acquisitions)

The definition of related transaction extends to a part disposal or part acquisition of rights or liabilities under the loan relationship. Accordingly, the assignment of all of the company’s rights in respect of part of the principal amount of a creditor loan relationship is a part disposal and therefore a related transaction.

For further guidance, see CFM31130.

A part disposal of rights can include a change in terms, for instance the termination of the right to receive interest on a loan or a change in the rate of interest receivable (unless that arises under the terms of the loan itself, such as where loan agreement ties the rate to some variable rate such as LIBOR or SONIA).

Thus all contractual rights and liabilities are included, and non-contractual rights and liabilities that are part of an arrangement. Rights include the right to receive interest and liabilities the obligation to pay it.

Loan relationship assigned for deferred consideration

Where a creditor loan relationship is sold for deferred consideration, the amount reflected in the accounts may depend on whether, and to what extent, the consideration is ascertainable or unascertainable when the disposal takes place. The amount brought into account under the loan relationships rules is the amount shown in the accounts. Any subsequent adjustments shown in the accounts will give rise to taxable credits or allowable debits, even though the company is no longer party to the loan relationship. See CFM33280 for more on amounts recognised after disposal.

See CFM41100 for guidance on whether deferred consideration on the disposal of an asset other than a loan relationship gives rise to a money debt.