813 Taxation of transactions associated with loans or credit

Summary

This section is intended to counteract arrangements under which credit might be given in consideration for what would be, in substance but not in form, interest with the aim of reducing the tax liability of the debtor. This might be done, for example, by drawing up an annuity agreement in consideration of a loan under which the equivalent of interest could be paid. This anti-avoidance measure was needed following the imposition of restrictions on the amount of interest which could be deducted for tax purposes by an individual.

Details

Application

(1) The section operates in the case of any arrangement for the lending of money or the giving of credit and in the case of any transaction facilitating such an arrangement.

(2) The section applies whether the parties to the relevant transactions are lender and borrower or persons connected with either of them. It applies, for example, where credit is given in consideration of an annuity payable by the borrower or his/her spouse to the lender or his/her spouse.

Certain payments treated as annual interest

(3) An annuity or other annual payment (not being interest) chargeable under Schedule D and payment of which is provided for under a transaction to which the section applies is treated for the purposes of the Tax Acts as if it were annual interest.

The charge to tax

(4) Where securities or other income-bearing assets are transferred in consideration of a loan, etc on the terms that they or equivalent assets will or may be returned later, the original owner is to be charged under Case IV of Schedule D on an amount equal to any income arising from the assets before the loan is repaid. For example, money is advanced by a bank to a borrower and securities are transferred to the bank, the income on which is payable to the bank during the period of the loan. The borrower does not therefore pay interest on the loan. Such a device is countered by imposing a tax charge on the borrower in respect of a sum equal to the interest on the securities which goes to the bank.

(5) A similar rule is applied where, in consideration of a loan, etc, the owner of any property agrees to assign, waive or forgo income from the property without transferring the property itself. The provision would affect, for example, share option schemes under which money was advanced to employees of a company to buy shares in it on the terms that, until the loan was paid off, they would assign their dividend rights to trustees nominated by the company or alternatively forgo any dividends.

(6) The previous subsection is adapted to cover a scheme whereby shares purchased on credit carry no, or restricted, rights to income while the purchase price is outstanding.

(7) In the case of income payable under deduction of tax (for example, dividends), the gross amount is to be taken into account for the purposes of subsection (5).

Relevant Date: Finance Act 2021