Specific rules exist within the loan relationships regime in Part 5 of the Corporation Tax Act 2009 (CTA 2009) for loan relationships between ‘connected companies’. Such loan relationships are referred to in Part 5 as ‘connected companies relationships’. In summary, where a company is party to a ‘connected companies relationship’, the implications are that: • the debits and credits that the company brings into account under Part 5 in respect of that loan relationship are required to be determined using the amortised cost basis of accounting (regardless of the actual accounting method used by the company in its financial statements), and • the impairment losses and release debits that can be claimed by a creditor company as loan relationship debits in respect of that relationship are restricted This Practice Note looks at: • when a connected companies relationship exists (including a consideration of the financial trader exception) • the requirement, for tax purposes, to use the amortised cost basis of accounting in relation to connected companies relationships and its impact, and • the special rules in Part

STOP PRESS: Abolition of non-dom regime and introduction of residence-based IHT regime Finance Act 2025 (FA 2025) which received Royal Assent on 20 March 2025, implements legislation to abolish the remittance basis of taxation and replace it with a residence-based regime, commencing on 6 April 2025. FA 2025 also replaces domicile as the key factor in establishing liability to inheritance tax. Other changes include amendment of the rules determining excluded property status, the abolition of protected settlements status of offshore trusts, and changes to overseas workday relief. For information on these changes, see: Practice Notes: The abolition of the remittance basis of taxation from 2025–26 and A new residence-based regime for IHT from 2025–26. The loan relationships rules in Part 5 of the Corporation Tax Act 2009 (CTA 2009) contain an anti-avoidance measure relating to so-called deeply discounted securities (DDS). Where these provisions apply, they can defer the time at which a corporation tax deduction is available to a debtor company in respect of the discount. It is important to note upfront that the scope

A ‘loan relationship’ is defined as a money debt arising from the lending of money. However, this definition does not reflect all the types of arrangements and transactions which are taxed under the loan relationships regime. The scope of the loan relationships regime is specifically extended to cover certain other arrangements and transactions which are regarded as being equivalent to debt finance. These are commonly referred to as ‘deemed loan relationships’ and include certain arrangements which, while not falling within the definition of ‘loan relationship’, produce a return that is economically equivalent to interest (sometimes referred to as an interest-like return). For more on the definition of loan relationship and the various types of ‘deemed loan relationships’ falling within the scope of the loan relationships taxing regime, see Practice Note: Loan relationships—what are they? For the computational rules governing how profits and losses on loan relationships are calculated and brought into account for corporation tax purposes, see Practice Note: Loan relationships—the main tax rules. What do the disguised interest rules target? The disguised interest rules seek to bring arrangements

Hybrid capital instruments are debt instruments that have equity-like features. These often include rights for the issuer to cancel or defer interest payments, they are often long-dated or perpetual, and may provide for release or conversion into shares in certain circumstances. Such features can lead to uncertainty as to whether payments under such instruments are taxed as interest (which is typically deductible under the loan relationships rules) or as distributions (which are not). This uncertainty can present particular challenges for the financial sector, where banking companies (under Basel III) and insurance companies (under Solvency II) are required to hold a certain amount of capital—sometimes referred to as regulatory capital, or capital requirements. The instruments issued to raise this capital must contain certain features to allow for loss-absorbency in the event of the bank or insurer coming under financial strain and having depleted levels of capital. Prior to 1 January 2019, securities issued by financial institutions and insurance companies to meet these regulatory capital requirements benefited from a specific taxing regime contained in The Taxation

A core principle of the loan relationships regime is that a company is required to bring profits and losses on its loan relationships into account for corporation tax purposes in line with its accounting treatment of those loan relationships, provided that accounting treatment is GAAP-compliant. For more on the general rules governing how profits and losses on loan relationships are calculated and brought into account for corporation tax purposes, see Practice Note: Loan relationships—the main tax rules. In certain situations, however, the loan relationships rules require the tax treatment of a company's loan relationships to depart from its accounting measure of profit and loss. One such situation might be where a debt taxed within the loan relationships rules: • becomes impaired, or • is released (in whole or in part) It should be noted upfront that the rules which can require a departure from the accounts in such cases are only in point where a company either accounts for a loan relationship using the amortised cost basis, or is required to apply the amortised cost

A core principle of the loan relationships regime is that a company is required to bring profits and losses on its loan relationships into account for corporation tax purposes in line with its accounting treatment of those loan relationships, provided that accounting treatment is GAAP-compliant. For more on the general rules governing how profits and losses on loan relationships are calculated and brought into account for corporation tax purposes, see Practice Note: Loan relationships—the tax main rules. In certain situations, however, the loan relationships rules require the tax treatment of a company's loan relationships to depart from its accounting measure of profit and loss. One such situation might be where a financial instrument taxed within the loan relationships rules: • becomes impaired, or • is released (in whole or in part) It should be noted upfront that the rules which can require a departure from the accounts in such cases are only in point where a company either accounts for a loan relationship using the amortised cost basis, or is required to apply

The general rule is that a company’s profits and losses from its loan relationships are computed and brought into account for corporation tax purposes on the basis of its accounting measure of profit or loss, pursuant to the rules found in Part 5 of the Corporation Tax Act 2009 (CTA 2009). In other words, a company’s accounts, prepared in compliance with generally accepted accounting principles (GAAP), provide the basis from which the taxable and relievable items and amounts in respect of a company’s loan relationships are derived. This principle is often referred to as ‘tax following the accounts’. There are, however, several exceptions to this general principle where the loan relationships rules prescribe a departure from the accounts and require loan relationship credits and debits to be calculated on a different basis. For more on the tax treatment of loan relationships generally, including how profits and losses on a company’s loan relationships are computed for corporation tax purposes, see Practice Note: Loan relationships—the main tax rules. One area where the tax rules can depart from reliance on the

STOP PRESS: Abolition of non-dom regime and introduction of residence-based IHT regime Finance Act 2025 (FA 2025) which received Royal Assent on 20 March 2025, implements legislation to abolish the remittance basis of taxation and replace it with a residence-based regime, commencing on 6 April 2025. FA 2025 also replaces domicile as the key factor in establishing liability to inheritance tax. Other changes include amendment of the rules determining excluded property status, the abolition of protected settlements status of offshore trusts, and changes to overseas workday relief. For information on these changes, see: Practice Notes: The abolition of the remittance basis of taxation from 2025–26 and A new residence-based regime for IHT from 2025–26. The loan relationships rules in Part 5 of the Corporation Tax Act 2009 (CTA 2009) contain a set of anti-avoidance provisions which relate to the late payment of interest. Where these provisions (the late-paid interest rules) apply, they can defer the time at which a corporation tax deduction is available to a debtor company in respect of interest on a loan relationship. It

As more fully discussed in Practice Note: Loan relationships—the main tax rules, the general rule is that credits and debits (very broadly, profits and losses) arising to a company from its loan relationships are brought into account for corporation tax purposes under the loan relationships regime on the basis of the company’s accounting measure of profit and loss, as disclosed in the company's relevant accounts prepared in accordance with generally accepted accounting practice (GAAP). In other words, a company’s accounts prepared in compliance with GAAP provide the means by which the existence, measure and the timing of taxable amounts in relation to its loan relationships are identified for corporation tax purposes. This approach is often described as ‘tax following the accounts’. The rules for the taxation of loan relationships are mainly contained in Part 5 of the Corporation Tax Act 2009 (CTA 2009) (CTA 2009, ss 292–476) (with some provisions also found in Part 6 (CTA 2009, ss 477–569)). There are, however, a number of specific circumstances where the rules for the taxation of loan relationships

A ‘loan relationship’ is defined as a money debt arising from the lending of money. However, this definition does not reflect all the types of arrangements and transactions which are taxed under the loan relationships regime. The scope of the loan relationships regime is specifically extended to cover certain other arrangements and transactions which are regarded as being equivalent to debt finance. These are commonly referred to as ‘deemed loan relationships’ and include certain other arrangements which, while not falling within the definition of ‘loan relationship’, produce a return that is economically equivalent to interest (sometimes referred to as an interest-like return). For more on the definition of loan relationship and the various types of ‘deemed loan relationships’ also falling within the scope of the loan relationships taxing regime, see Practice Note: Loan relationships—what are they? For the computational rules governing how profits and losses on loan relationships are calculated and brought into account for corporation tax purposes, see Practice Note: Loan relationships—the main tax rules. What do the shares accounted for as liabilities target? The

The loan relationships rules in the Corporation Tax Act 2009 (CTA 2009) govern the taxation and relief of a company’s profits and losses arising from its ‘loan relationships’. For the definition of a ‘loan relationship’, as well as the other types of transactions and arrangements which (although not ‘loan relationships’) also fall within the scope of the loan relationships tax rules, see Practice Note: Loan relationships—what are they? This Practice Note describes the rules which determine how profits and losses arising from a company’s loan relationships are computed and then brought into account for corporation tax purposes. Most of the tax rules relating to loan relationships are found in CTA 2009, Pt 5 (ss 292–476), although some further provisions are found in CTA 2009, Pt 6 (ss 477–569). HMRC guidance can be found in its Corporate Finance Manual starting at CFM30000. For an overview of the accounting principles relevant to the taxation of loan relationships, see Practice Note: Loan relationships—accounting framework and principles. This Practice Note does not address the taxation of insurance business and

As more fully discussed in Practice Note: Loan relationships—the main tax rules, the general rule is that credits and debits (very broadly, profits and losses) arising to a company from its loan relationships are brought into account for corporation tax purposes under the loan relationships regime on the basis of the company’s accounting measure of profit and loss, as disclosed in the company's relevant accounts prepared in accordance with generally accepted accounting practice (GAAP). In other words, a company’s accounts prepared in compliance with GAAP provide the means by which the existence, measure and the timing of taxable amounts in relation to its loan relationships are identified for corporation tax purposes. This approach is often described as ‘tax following the accounts’. The rules for the taxation of loan relationships are mainly contained in Part 5 of the Corporation Tax Act 2009 (CTA 2009) (CTA 2009, ss 292–476) (with some provisions also found in Part 6 (CTA 2009, ss 477–569)). There are, however, a number of specific circumstances where the rules for the taxation of loan relationships