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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.