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CTM15505 – Distributions: general: interest or other value in respect of securities – reasonable commercial return – examples – HMRC internal manual

FHDDS51830 - Penalties, sanctions and offences: penalties – policy: special reductions - When special circumstances do not exist - HMRC internal manual

CTA10/S1000 (1) E

A loan with a fixed interest rate issued per pair

The guarantee is issued for a period of 1 year on £100 with a coupon at a commercial rate of 5 per cent. The investor receives £105 at the end of the year.

CTA10/S1000 (1) E will not bite. The return (5 per cent) on the principal insured (£100) is commercially reasonable.

A fixed interest loan issued with a premium

A guarantee of a face value of £100 is issued for a period of one year, at a premium of £2, for £102. The coupon is at a commercial rate of 7.1 per cent to recognize the fact that the £2 principal will not be repaid. The investor receives £107.10 at the end of the year.

The return on principal plus premium is £5.10 (£107.10 minus £102). £102 @ 5 per cent equals £5.10, which is the aggregate commercial interest rate under CTA10/S1007 for the principal insured and for the premium. The provision will not apply if CTA10/S1008 applies.

The fee exceeds the amount of the insured principal.

In the example under 2 above, CTA10/S1008 will apply if CTA10/S1007 does not, subject to CTA10/S1009 and CTA10/S1012. Under this provision, the insured principal is treated as a new charge of £102. A refund of £5.10, which is 5 per cent of £102, is commercially reasonable for the use of the principal insured and therefore no distribution occurs under CTA10/S1000 (1) E

CTA10/S1000 (1) E would still apply to the excess yield, regardless of the application of CTA10/S1007 or CTA10/S1008 if the rate in the example were 7 per cent and the reasonable commercial rate was 5 per cent.

Equity index linked loan, guaranteed return on subscription

The guarantee is issued for a period of one year at £100. The return is £100 plus 70 per cent of any rise in the stock market index.

There is no risk that the lender will lose any of the amount subscribed and therefore the prospect of 70 per cent of any rise in the stock index, which is freely traded in the markets, represents a reasonable commercial return. CTA10/S1000 (1) E will not recharacterize any return as a distribution.

Loan linked to share indices, market strengthening, low guaranteed amount returned

The guarantee is issued for a period of one year at £100. The prospects for a rising stock index look strong, but of course there can be no guarantee.

If the stock market index falls, the investor will receive:

  • invested amount minus the reduced value of the invested amount calculated by reducing the value of the stock market index, with a guaranteed minimum returned amount of 1 percent of the invested amount.

If the stock market index rises, the investor will receive:

  • the invested amount and 80 percent of the increase in the stock market index.

CTA10/S1008 may be applied. In practice, this is unlikely unless the issuer is a bank or securities house. If applied, the principal sum assured will become £100. The index reflects the value of shares traded on the open market and a return less than the amount of that increase (less reasonable investment management costs) would be a reasonable commercial return. This is because initially the lender can only expect the maximum return that the commercial markets provide. CTA10/S1000 (1) E would therefore not apply in the above example (although it would apply to any return above a reasonable return).

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Each of the distribution provisions must be considered independently.

In cases where CTA10/S1000 (1) E does not apply, due to the application of CTA10/S1008, the provisions of CTA10/S1000 (1) F should be borne in mind.

The provisions on credit relations will apply if the refund is treated as interest.

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