CheckLists.Tax (beta)
K1: Making/receiving a loan
GENERAL
​
Meaning of loan
​
- Misappropriations
​
- Not loans if taken without proper authorisation (EIM26510).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- One loan or multiple loans
- See EIM26109.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
Meaning of debt
​
- General
​
- Distinction between a debt and a claim for damages (Khan v. Singh-Sall [2023] EWCA Civ 1119, §§26 - 28; O’Driscoll v. Manchester Insurance Committee [1915] 3 KB 499).
- Uncertain sum that is capable of being rendered certain can be a debt (Khan v. Singh-Sall [2023] EWCA Civ 1119).
- Contingent right to an unascertainable sum of money not a debt (Marren v. Ingles [1980] STC 500 ).
- employee's liability under facility agreement, according to which the amount and timing of repayment were uncertain was incurring a debt (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), §66).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
Deemed loans
​
- Employer facilitating a loan
​
- For meaning of facilitating see EIM26105.
- Employer providing funds for loan is facilitating (e.g. providing funds to EBT) (EIM26110).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Employer providing any form of credit or advance
​
- Credit is the deferral of payment of a sum which, absent agreement, would be immediately payable (Grant v. Watton [1999] STC 330).
- Defaulting on a payment obligation without asking for time to pay is not obtaining credit and merely allowing a default to occur is not giving credit (R v. Miller [1977] 1 WLR 1129).
- Structured settlement is not credit (CFL Finance Limited v. Bass [2019] EWHC 1839 (Ch)).
- Not every postponement of a payment is credit (Dimond v. Lovell [2002] 1 AC 384 at 405).
- Advance means early payment of an amount that will or may become due to the recipient in the future (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), §61, Warren J and Judge Sinfield).
Legislation: ITEPA s.173(2)(a);
Cases: Grant v. Watton [1999] STC 330; Nejad v. City Index [1999] EWCA Civ 1812, §57; R v. Miller [1977] 1 WLR 1129; CFL Finance Limited v. Bass [2019] EWHC 1839 (Ch); Williams v. Range [2004] EWCA Civ 294; Dimond v. Lovell [2002] 1 AC 384
HMRC manuals: EIM26108;
Commentary:
See also:
​
- Alternative finance arrangements
​
- Employment income - treated similarly (EIM26515).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Close companies acquire control of a company that has made a loan or advance
​
- Company that made loan deemed to have made it immediately after control acquired by the close company (CTA 2010, s.460).
- If control is acquired by two or more close companies, the loan is deemed to be made by each of those close companies and apportioned between them (CTA 2010, s.460).
- Query whether the above applies if the company that made the loan was not, at that time, controlled by another company (s.460(1)).
- Exclusion where no connection between the making of the loan and the acquisition of control and/or the funding to the company that made the loan (CTA 2010, s.461).
- The intention is to limit this deeming to cases in which "a loan by the controlled company is clearly related to an application of the controlling company's own funds" (CTM61740).
- Consequential adjustments to operation of legislation in CTA 2010, s.462.
Legislation: CTA 2010, s.460 - 462;
Cases:
HMRC manuals: CTM61720; CTM61730; CTM61740.
Commentary:
See also:
​
- Arrangement under which close company makes loan not to participator and another person makes a payment etc. to participator
​
CTA 2010, s.459
- Limited exceptions in s.459(3).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
INCOME TAX
​
Trading
​
- Deduction for the incidental costs of seeking/obtaining finance where interest on finance is deductible
​
General rule
- Deduction allowed in calculating profits of trade for the incidental costs of obtaining finance by means of a loan/loan stock if the interest on the loan is deductible (ITTOIA s.58).
​
Exclusion for convertible loan stock
- No deduction under s.58 where the loan/loan stock carries a right to conversion exercisable within 3 years of obtaining the loan (s.59).
- But if, in the event, the conversion does not happen within 3 years, incidental costs in those 3 years are deductible at the end of 3 years (s.59(3)).
- Conversion partly exercised - proportion of costs allowed.
​
Incidental costs
- Means expenses which are (s.58(2)):
(1) Incurred on fees, commissions, advertising, printing and other incidental matters; and
(2) Incurred wholly and exclusively for the purposes of obtaining the finance, providing security for it or repaying it.
- Key person insurance policy:
- Costs of taking out the policy are incidental costs.
- Premiums on the policy are not (BIM45525).​​​
​
Abortive costs
- Expenses incurred wholly and exclusively for the purpose of obtaining finance/providing security are incidental even if it is not obtained (s.58(3)).
​
Legislation: ITTOIA s.58;
Cases:
HMRC manuals: BIM45525;
Commentary:
See also:
​
Close companies
​
- Benefit to shareholder/participator
​
- Query whether any expense is incurred
Legislation: CTA 2010, s.1064
Cases:
HMRC manuals:
Commentary:
See also:
​
Settlements code (attribution of income to settlor)
​
- Loan to/guaranteeing loan to company owned by children as a settlement
​
- Butler v. Wildin: T's children acquired shares for a 'trifling sum' in a company set up to carry out a development project. T made loans to the company and guaranteed bank loans. Held that this arrangement was a settlement.
- "The risk that the development would not prove profitable and might result in loss was taken by the taxpayers."
- "the arrangement made by the taxpayers was clearly a reciprocal arrangement under which each contributed, whether by the provision of skill and services or by making temporary loans, to the common purpose of providing the shareholders of the company and so indirectly and to the extent of their shareholding the four older children with an income-producing asset free of risk and cost."
- Shares transferred later by an uncle were disregarded as not being part of the arrangement.
- Shares transferred later by father were their own settlement.
​
Legislation:
Cases:
Butler v. Wildin [1989] STC 22;
HMRC manuals:
Commentary:
See also:
​
- Loan to trust on less than commercial terms makes the lender a settlor of those funds
- A loan to a trust on non-commercial terms is regarded as the provision of funds to the settlement (SP 5/92, §22).
- In Wachtel, the settlor guaranteed a loan to the trust and placed money in a deposit account with the lending back. The settlor was held to have settled the whole sum (including the borrowed sum) and retained an interest (because the trust payments of income to the bank released the settlor's deposit pro tanto).
- May also mean an interest is retained.
- "The question, therefore, is whether on the facts of this case the settlor can be said, during the year 1937–1938, to have had an interest in income arising under the settlement in the extended meaning of that phrase which is found in sub-s (4). The position when the trustees received the income of that year was this: As I have pointed out, they could have applied it in any one of the three ways which I have mentioned so far as the language of the settlement is concerned. The one that they chose was the third, namely, the payment off of the loan, or part of it. At the moment before they had come to the decision to apply the money in that way, it was, I think, true to say that if they so determined, the money would thereupon have become applicable for the benefit of the settlor. It is not disputed that the repayment of a non-interest bearing loan was for the benefit of the settlor within the meaning of this subsection. It is, therefore, not necessary to consider what the position would be if the loan had been of a different description. My words must not be taken as expressing any view on that point." (Jenkins)
​
Legislation:
Cases: Jenkins v. IRC 26 TC 265 at 279, CoA; IRC v. Wachtel [1970] 3 WLR 857;
HMRC manuals:
Commentary:
See also: SP 5/92;
​
- ​Money borrowed on security of assets is the proceeds of those assets (must not be capable of benefitting settlor/spouse)
- If related property is or can be paid to/applied for the benefit of the settlor/spouse, the settlor has an interest.
- Related property includes property representing the proceeds of the property.
- Where:
(1) Trust 1 borrows money on the security of assets provided by the settlor;​
(2) Trust 1 transfers the borrowed money to Trust 2.
(3) The settlor is excluded from Trust 1 but not Trust 2.
Then:
(1) The borrowed money is the 'proceeds' of the assets provided by the settlor
(2) And remains the proceeds even when transferred to Trust 2.
- "[17] ... The difficulty with this argument is that it does not deal with the relevant question: whether in relation to the proceeds of the mortgage of the Einkorn shares the moneys comprised in the second settlement constituted derived property. They plainly did when they were received by the trustees of the first settlement; they did not change their character when they were transferred to the trustees of the second settlement; and the settlor continued to enjoy the income from them during the relevant year. The fact that the settlor obtained his right to income under the trusts of the second settlement is immaterial if the income represented the income of the proceeds of property comprised in the first settlement." (West v. Trennery HoL)
​
Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
​
- Loan to settlor/spouse is capital payment to settlor triggering the s.633 charge​
- Capital sum includes payment by way of loan.
- Reference to settlor includes spouse/civil partner (s.634(7)).
- Can include payments to third parties at the settlor's direction or for his/her benefit (ITTOIA s.634(5)).
- Exclusion for certain temporary loans (ITTOIA s.642; CTM61090).
- Further notes:
Legislation: ITTOIA s.634;
Cases:
HMRC manuals: CTM61080;
Commentary:
See also:
​
- Loan to third party at settlor's direction/for settlor's benefit treated as capital payment to settlor (settlor has deemed income)
​
- A loan is a capital payment for the purposes of ITTOIA s.633.
- A capital payment paid by the trustees to a third party at the settlor's direction etc. is treated as paid to the settlor (s.634(5)).
- Accordingly a loan to a third party by the trustees at the direction of the settlor is treated as a capital payment to the settlor.
- Further notes:
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Loan to settlor by company connected with trust: deemed capital sum by trust to settlor if company has received associated payments
​​​
Background
- Where the settlor/spouse of a trust receives a capital payment from the trust, income of the trust can be matched to that capital sum and taxed on the settlor (ITTOIA s.633).​
- Capital sum means: (i) loan; (ii) repayment of a loan; (ii) any sum paid other than as income and not for full consideration.
- See i8. Distributions to beneficiaries for further notes.
​
Capital sums by connected company deemed to be made by trustees
- Where:
(1) A capital sum (including loan, repayment of loan) is paid to the settlor by a body corporate connected with the settlement; and
(2) The trustees make an associated payment (directly or indirectly) to the body corporate,
Then: the capital sum is treated as paid by the trustees to the settlor for the purposes of s.633 (ITTOIA s.641).
- Connected body corporate - see s.637(8).
- Reference to settlor includes spouse (s.643(1)).
- For meaning of associated payments and quantum of capital sum etc. see i8. Distributions to beneficiaries.
​​​
Associated body corporate
- A payment by/to a body corporate which is associated with another body corporate may be treated as paid by/made to that other (s.643(4)).
- Associated - see CTA 2010 s.449. ​
​
Exclusion for certain loans to settlor
- Loan to settlor by a body corporate is not caught where (s.642):
(1) The whole loan is repaid within 12 months.
(2) No loans by any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
(3) No loans made by the settlor to any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
​
Legislation:
Cases:
HMRC manuals: CTM61070;
Commentary:
See also:
​
Transfer of assets abroad
​
- Loan between entities: matching benefits from one entity with income arising in another entity.
​
- A loan between entities (e.g. trusts, companies etc) may provide grounds for matching benefits provided by the borrower with income that has arisen or does arise in the lender.
- See Company related: G5. Other benefits.
- See Trust related: i9. Benefits provided.
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
Transactions in securities
​
- Loans as securities/transactions in securities
​
- In Williams the loans were transaction in securities because a condition of the loan was that the borrower had to deposit Government stock as security for the loans - the loan related to the government stock deposited (CoA at 302; see HoL at 309).
- “[29] The word "securities" includes not only stocks and shares of every description, including preference shares, but also debentures and unsecured loan notes. It would not be a normal use of language to describe the payment of a fixed dividend in respect of preference shares as a transaction relating to securities; and I would at least pause before attaching such a description to the payment of interest on a debt merely because it was secured by a debenture or unsecured loan note.” (Laird)
- “The meaning of transactions in securities has been clarified by case law as including the following: … Loans made by a company to individuals who subsequently acquired the company.” (CTM36810)
- Query the relevance of the meaning of debt on a security for CGT purposes (CG53425 - debt needs to be capable of being held as an investment + realised at a profit).
- If loan is a transaction in securities, repayment is a further transaction in securities - “The redemption of the debentures was, in my opinion, a transaction relating to them and so a "transaction in securities" as defined by the section. I think that the issue of the debentures on May 18, 1953, was also a "transaction in securities" within the meaning of the section.” (Parker at 161 - gap between original transaction and receipt of cash was 7 years)
​
Legislation:
Cases:
IRC v. Parker [1966] AC 141;
IRC v. Laird Group Plc [2003] UKHL 54;
HMRC manuals: CTM36810; CG53425;
Commentary: Kessler, Ch 55;
See also:
​
EMPLOYMENT INCOME TAX
Cash equivalent of employment-related cheap loan treated as earnings
​
- Cheap loan is one on which less than the official rate of interest is paid.
- Official rate prevents arguments over what would be a commercial rate of interest on an equivalent loan (EIM26103).
- Different official rate may apply for loan in foreign currency to person who normally lives in that country (s.181(2); EIM26105).
- Exclusion for loans made by individual in the ordinary course of personal relationships (s.174(5)).
- Treated as discharged on death (s.190).
Legislation: ITEPA s.174; s.175; SI 1989/1297;
Cases:
HMRC manuals:
Commentary:
See also:
​
- Applies to shadow directors
​
- Where company makes a loan and the recipient is not an appointed director, consider whether the individual is a shadow director (and, therefore, treated as an employee).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Applies to loans to relatives of employee (unless employee derives no benefit)
​
- Wide meaning: Relative is (1) spouse or civil partner; (2) parent or child or remoter relation in direct line of employee or spouse/civil partner; (3) brother or sister of employee or spouse/civil partner; (4) spouse/civil partner of remoter relation or brother/sister.
- Exclusion if loan is to relative and employee derives no benefit from it (s.174(5)).
Legislation: ITEPA s.174;
Cases:
HMRC manuals: EIM21742; EIM26112;
Commentary:
See also:
​
- Applies to loans from persons other than the employer (e.g. persons controlled by or controlling employer)
​
- Employer treated as making a loan if it arranges, guarantees or in any way facilitates the loan.
- HMRC say that employer funding EBT which makes a loan is the employer facilitating the loan.
- Applies to loans from entities that (1) the employer controls; (2) control the employer; (3) are under common control with the employer.
- Applies to loans from persons having a material interest in a close company which was the employer, controlled the employer, or was controlled by the employer.
- Close company does not include a non-resident company - ITEPA Schedule 1, Part 2, leading to ITA 2007, s.989, leading to the ordinary meaning in CTA 2010.
- Applies to loans from persons having a material interest in a company or partnership that controls such a close company.
- Close company does not include a non-resident company - ITEPA Schedule 1, Part 2, leading to ITA 2007, s.989, leading to the ordinary meaning in CTA 2010.
Legislation: ITEPA s.173(2)(b); s.174(2);
Cases:
HMRC manuals: EIM26110; EIM26113;
Commentary:
See also:
​
- Applies to prospective employees but not former employees
​
- Charge ceases if the individual ceases to be an employee.
Legislation: ITEPA s.174(3);
Cases:
HMRC manuals: EIM26102;
Commentary:
See also:
​
- Potential charge if loan recipient later becomes an employee
​
- Leaving a loan repayable on demand outstanding after an individual becomes an employee could amount to "any form of credit".
Legislation: ITEPA, s.173(2)(a);
Cases:
HMRC manuals:
Commentary:
See also:
​
- Loan to employee who later becomes UK resident or starts working in the UK
- The charge will apply if made in contemplation of the employee working or living in the UK and are in respect of that period (EIM26105).
- The charge will apply to a loan made when the employee was not chargeable to UK tax if, after the employee's earnings are chargeable to UK income tax, the employer in any way facilitates the continuation of an existing loan (EIM26105).
- HMRC say that the employer does not facilitate the loan merely because it is conditional on the employee continuing in employment, but would if the loan was conditional on the employer making regular payments to subsidise the interest, which it might cease (EIM26105).
Legislation: ITEPA s.16(2); s.173(2)(a);
Cases:
HMRC manuals: (EIM26105);
Commentary:
See also:
​
- Official rate for loan in Japanese/Swiss currency to person who normally lives in that country
​
- A loan made in Japanese/Swiss currency for the benefit of an employee who normally lives in that country and who has lived in that country at some time in the past 6 years is subject to a different official rate (Japan: 3.9%; Switzerland: 5.5%).
Legislation: SI 1989/1297, r.5(2);
Cases:
HMRC manuals: EIM26106;
Commentary:
See also:
​
REMITTANCE BASIS ISSUES
​
Query whether benefit of cheap employment-related loan can be remitted
​
XX
Legislation: ITA 2007, s.809VH
Cases:
HMRC manuals:
Commentary:
See also:
​
​
Reversal of business investment relief from remittance
​
Cheap loan may breach extraction of value rule
XX
Legislation: ITA 2007, s.809VH
Cases:
HMRC manuals:
Commentary:
See also:
​
​
CORPORATION TAX
Close company makes loan/gives credit to shareholder/participator
​
- Company required to pay corporation tax
XX
Legislation: CTA 2010, s.455;
Cases:
HMRC manuals:
Commentary:
See also:
​
- Loan/credit to associate of a participator
XX
Legislation: CTA 2010, s.455;
Cases:
HMRC manuals:
Commentary:
See also:
​
- Non-UK resident company is not a close company
- No charge if the company is not UK resident when the loan is made, even if it later becomes UK resident.
- But charge applies where non-close company is controlled by a close company (CTA 2010, s.460).
- Exception where no connection between making loan and acquisition of control or between the loan and provision of funds by the close company (CTA 2010, s.461).
Legislation: CTA 2010, s.455, s.460;
Cases:
HMRC manuals: CTM61710;
Commentary:
See also:
​
Loan by close company to holding company to allow it to pay off purchase consideration loan notes
​
- Potential deemed loan by close company to participator
- "Consideration should be given to whether Section 459 could be applied to loans to partnerships that are not otherwise chargeable (see CTM61520) and, similarly, to loans to employee share schemes/employee benefit trusts etc where Section 455 (1) does not apply (see CTM61525).
It should also be considered in management buy-out situations. In many cases the close company makes a loan to the new owners who then use those funds to pay the outgoing shareholders for their shares. Whilst this can be a difficult area in which the facts are absolutely crucial, it is exactly the type of arrangement which should be chargeable under Section 455. The company’s own money is being used to buy out the existing shareholders." (CTM61550)
- No charge if money transferred intra-group by way of dividend instead.
Legislation: CTA 2010, s.459;
Cases:
HMRC manuals: CTM61550;
Commentary: Kessler: Loans From Companies
See also:
​
CAPITAL GAINS TAX
​
Matching non-resident settlement gains to benefits
​
- Loan as a capital payment/benefit
​
General
- A loan may be a capital payment/benefit for the purposes of the CGT rules matching non-resident settlement gains to benefits (s.97).
- Value is based on official rate of interest less interest actually paid in the tax year.
- Note that:
- Settlement is not limited to trust and has its broad ITTOIA s.620 meaning. An outright gift can be a settlement.
- UK resident companies receiving capital payments can be taxable.
- There are rules to deem payments made to companies to be made to participators and payments by companies as made by trustees.
- See:
- G5. Other benefits from company
- i9. Benefits provided by trust
​
Capital payment within group 100% owned by trust (generally ignore)
- HMRC say: "In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of TCGA 1992 Sch 5 para 9(3) and are not treated as capital payments within TCGA 1992 s 97." (SP5/92, §18)).
​​
Loan to close family member attributed to UK resident settlor
- Note the rule attributing a capital payment/benefit provided to a close family member of the settlor, to the settlor (s.87G).
- Applies where settlor is UK resident.
- See i9. Benefit provided by trust.
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Capital payment/benefit recipient making loan to UK resident: deemed capital payment receipt by UK resident
​​
- The onward gift rule applies (see i9. Benefits provided by trust) where (inter alia) the original recipient provides a benefit to the subsequent recipient that includes (all or part) of the original benefit or anything that derives from the original benefit.
- The effect of the onward gift rule is that the onward gift is treated as a capital payment received by the onward gift recipient​​
- If the original recipient receives money (or, perhaps, converts an asset received into money) and lends it to another on favourable terms, part of the benefit has been passed on. (subject to application of the other conditions).
- The same may apply where a debt on favourable terms is owed by a UK resident to trustees who assign the benefit of the debt to a non-UK resident beneficiary, at least where the debt could be called in but is not.
​
Legislation: TCGA s.87HA.
Cases:
HMRC manuals:
Commentary:
See also:
​
INHERITANCE TAX
Transfer of value/gift
​
- Cheap loan
​
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
Gift with reservation of benefit
​
- Receiving a loan from gifted money as a gift with a reservation of benefit
​
- Loan of gifted money or an equivalent amount is a reservation of benefit (IHTM14336).
- Applies even if commercial rate of interest is paid.
- Same applies if money borrowed is income from money gifted to settlement (Permanent Trustee Co).
- Note that the tracing rules do not apply to absolute cash gifts, not becoming settled property (IHTM14372).
Legislation:
Cases: Commissioner of Stamp Duties of New South Wales v. Permanent Trustee Co [1956] AC 512;
HMRC manuals: IHTM14336;
Commentary:
See also:
​
- Whether cheap loans give rise to gift with reservation
- HMRC say that there is a gift "the property disposed of is the interest foregone", but no reservation of benefit.
Legislation:
Cases:
HMRC manuals: IHTM14317;
Commentary: McCutcheon 7-53;
See also:
​
- Whether donee of debt not calling in debt gives to to a reservation of benefit
- HMRC's view in relation to double trust arrangements is that not calling in the loan is a reservation of benefit in the gift of the loan because if the loan was called in, the debtor trust would be forced to sell the property and the beneficiary of the debtor trust would not be able to occupy it (IHTM44104).
- HMRC's view that there is a reservation of benefit where the terms of the loan prevent it being called in before a certain date has been rejected (IHTM44105; Pride, §100; Elborne).
Legislation:
Cases:
Pride v. HMRC [2023] UKFTT 316 (TC);
Elborne v. HMRC [2025] UKUT 59 (TCC);
HMRC manuals: IHTM44104; IHTM44105;
Commentary:
See also:
​
- Property derived from loans to settlements
- Property derived from loans to settlements in which the settlor retains an interest is/can be property subject to a reservation (IHTM14401).
Legislation:
Cases:
HMRC manuals: IHTM14401
Commentary: McCutcheon 7-53;
See also:
​
- Loan to trust from which lender excluded not a gift with reservation
- HMRC accept that a loan to a trust settled by the lender but from which the lender is excluded, does not give rise to a reservation of benefit in the settlement, even if repayable on demand (IHTM44113).
Legislation:
Cases:
HMRC manuals: IHTM44113;
Commentary:
See also:
​
Limits on deductability for IHT purposes
​
- Consideration given by creditor for debt derives from the deceased
​
- Debt incurred by deceased disallowed if the value of any consideration given by the creditor for the debt consisted of (FA 1986, s.103):
- property derived from the deceased; or
- consideration given by any person who was entitled to or had property derived from the deceased.
- Deemed ownership under IHTA s.49 does not involve deeming beneficiary to incur liabilities of trustees (even though those are taken into account when calculating value) (Elborne UT, §59).
- Limb 1 requires two transactions: (1) transaction by deceased which provides what becomes the consideration for the debt; (2) use of that consideration to give rise to liability for deceased (Elborne UT, §63 - this would have been relevant, on the facts, if the debt incurred by the trustees had been deemed to be incurred by the IIP-beneficiary).
Legislation: FA 1986, s.103;
Cases:
McDougal's Trustees v. The Lord Advocate [1952] SC 260;
Elborne v. HMRC [2025] UKUT 59 (TCC);
HMRC manuals:
Commentary:
See also:
​