Section 418 | Loan relationships involving connected debtor and creditor where debits exceed credits ^F1

(1)This section applies if—^F1

(a)two connected companies are party to a loan relationship, one (“the debtor”) as debtor and the other (“the creditor”) as creditor, and^F1

(b)conditions A and B are met.^F1F2

(2)Condition A is that the rights under the loan relationship include provision by virtue of which the creditor company or any company connected with it—^F1F3F4

(a)is or may become entitled, or^F1F3

(b)is or may be required,^F1F3

to acquire (whether by conversion or exchange or otherwise) any shares in any company.

(3)Condition B is that—^F1F3

(a)the debits brought into account by the debtor under this Part in respect of the loan relationship for any accounting period, exceed^F1F3

(b)the credits brought into account (otherwise than as a result of this section) by the creditor in respect of the loan relationship for the corresponding accounting period or periods of the creditor.^F1F3

(5)The creditor is treated for the purposes of this Part as bringing into account for the corresponding accounting period or periods additional credits in respect of the loan relationship of an amount equal to the excess.^F1

(6)But if the creditor is a party to the loan relationship as creditor during only part of the corresponding accounting period (or any of the corresponding periods), it is treated for the purposes of this Part as bringing into account for the period only such part of the excess as is just and reasonable.^F1

(6A)For the purposes of this section the creditor is to be treated as continuing to be a party to the loan relationship even though the creditor has disposed of the creditor's rights under the loan relationship to another person—^F1F5

(a)under a repo or stock lending arrangement, or^F1F5

(b)under a transaction which is treated as not involving any disposal as a result of section 26 of TCGA 1992 (mortgages and charges not to be treated as disposals).^F1F5

(6B)For the purposes of this section the creditor is to be treated as continuing to be a party to the loan relationship even though the creditor has disposed of the creditor's rights under the loan relationship to another person if the disposal was made with the relevant avoidance intention.^F1F5

(6C)The relevant avoidance intention is the intention of eliminating or reducing the credits to be brought into account for the purposes of this Part.^F1F5

(7)Sections 418A and 419 supplement this section.^F1F6