Disguised interest

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Disguised interest
  • Introduction
  • Effective date
  • Core principle
  • Exemptions

This guidance note provides assistance with the anti-avoidance provisions governing the taxation of disguised interest as found in CTA 2009, ss 486A–486E (Pt 6, Ch 2A).


Disguised interest is a term which is only found in tax law. It refers to an amount that, from an economic perspective, comprises an interest-like return but is typically either a capital (rather than an income) gain for tax purposes or falls outside the charge to tax completely.

The disguised interest rules are anti-avoidance provisions which seek to ensure that an interest-like return is always charged to corporation tax, even where it is obtained from a transaction that is neither a loan nor treated as a loan.

The rules work by:

  • requiring any company that is party to an arrangement that produces a return economically equivalent to interest is charged to corporation tax on the return as if it were a profit from a loan relationship
  • excluding certain types of arrangement

The rules are subject to a motive test. A company can only be charged under these provisions where (one of) the main purposes of entering into the arrangement is to secure a relevant tax advantage as defined in CTA 2009, s 486C(4).

Effective date

In response to revelations under the disclosure of tax avoidance schemes (DOTAS) rules, similar anti-avoidance measures known as the ‘shares as debt’ rules were introduced by Finance Act 2004. However, these were repealed in 2009 on the introduction of the disguised interest provisions.

As a result, there are complex transitional provisions and disguised interest rules apply as follows:

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