CFM96300 - Interest restriction: related parties: where unrelated parties hold at least 50% of debt with the same rights: examples

Example One

A group is ultimately owned by an individual (A), who makes a £100m loan to the group which accrues interest of £10m per annum. Under the basic rule, the £10m interest is excluded from the group's interest expense because it is from a related party by virtue of the participation condition.

At the same time, the group borrows £100m from an unrelated party (B) which also accrues interest of £10m per annum. The rights conferred by both loan relationships are the identical. The relevant conditions are therefore met and the £10m interest paid to A can be treated as paid to an unrelated party and included in qualifying net group interest expense (QNGIE) (along with the £10m interest paid to B).

Example Two

The facts are the same as example one except the loan to B only accrues interest of £8m per year.

The difference in interest due under the two loan relationships means that the terms and conditions on which the money is lent are not the same. The loan from A is therefore still treated as paid to a related party, and will be excluded from qualifying net group-interest expense (QNGIE).

Example Three

The facts are the same as example one except B enters into a side agreement with the debtor which prioritises the debt from B above the debt from A in the event of a winding up of the debtor.

The side agreement means that arrangements are in place to give different creditors different rights. The loan from A is therefore still treated as paid to a related party and excluded from qualifying net group interest expense (QNGIE) accordingly.

Example Four

The facts are the same as example one except the loan agreement states that creditors without shares in the group are prioritised over creditors with share capital in the event of a winding up. Similar to example three, the rights are not the same between A and B, so the provision cannot apply, and A will remain as a related party in respect of the loan relationship.

Example Five

The facts are the same as example one except the loan from the owner is made to the ultimate parent, whereas the third party is loan is made to an intermediate holding company. Although the terms of the loans are identical in terms of commitments, the different debtor means that the loan to the related party is structurally subordinated to the third-party loan.

As such, the position of the creditors is not the same. The loan from A is therefore still treated as paid to a related party and excluded accordingly.