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With relatively low interest rates on cash deposits, some companies are looking to invest their spare cash elsewhere, especially if investing in the company's own operations is not desired or feasible. Sometimes investing in another company can offer a better return on capital compared with reinvesting in one's own company. Companies also lend to each other not only for investment purposes but for tax efficiency.

There are circumstances in which lending funds one company to another can be tax efficient, allowing the removal of profit from one company and its injection into another, particularly in scenarios where losses have been incurred or where the small company tax rate band has not been fully utilised. Tax implications only arise when 'connected companies' lend to each other; however, if the loan relationship rules are satisfied, such lending can be conducted in a tax-efficient manner.

'Connected companies'

According to HMRC's Corporate Finance Manual at CFM 35120 indicates that two companies are considered 'connected' if:

'if, during the accounting period, one has 'control' of the other, or both are under the control of the same person. ‘The test is whether a person can “secure that the company’s affairs are conducted in accordance with his wishes”. A person (an individual or company) can do this by

holding most of the shares, or

holding most of the voting rights in the company (or another company, such as the ultimate parent), or

through any other powers, given through any document (such as the company’s Memorandum and Articles of Association).’

Connected companies are subject to special tax rules on loan relationships, which apply to all types of loans, whether cash is involved or not, and whether the company is the lender or borrower. These rules require that loans be treated as if they were made on normal commercial terms between unrelated parties. The rules also set out how any gains or losses from changes in loan values or related transactions are dealt with, if relevant.

Should interest be charged?

The transfer of the loan principal itself has no tax effect as tax consequences only arise if interest is charged and received; such interest being tax deductible when accrued, rather than when paid. Loans need not be from a lower profit company to another – it can be the other way round. Lending from a lower profit company to a higher profit-making company can reduce the higher company's corporation tax liability if interest is charged. Such interest will be tax deductible in the hands of the higher profit-making company.

However, care should be taken in the rate charged. A 20% rate will no doubt raise HMRC's interest; however, bank base rate plus about 3% should be more acceptable. The lending is deemed unsecured to a private company, therefore a risk uplift to the rate would seem to be appropriate. With the bank base rate currently at 4%, an inter-company rate of 7% should be reasonable.

Loan written off

Loans between connected companies  written off are usually treated as ’tax neutral’ for corporation tax purposes if they fall within the loan relationship rules. To do so, the loan must be a money debt and have arisen 'from a transaction for the lending of money'. Although trading debts do not arise from the lending of money 'bad' trading debts and property business debts come under these rules. When such loans are written off, the write-off is effectively disregarded for corporation tax purposes such that the lending company cannot claim tax relief but the borrower is not charged to tax on the amount written off.

Practical point

Loans made between family companies that are not ‘connected’ for loan relationship purposes may be deemed to have been granted due to the nature of the family relationship rather than for commercial purposes. If so, and the loan is written off, the borrower company will be taxed on the credit, and the lender company is denied relief under the ‘unallowable purpose’ rules.

The rate of SDLT payable on the purchase of a property depends on whether it is a residential property or not, and if so, whether the supplement applies. As SDLT payable on residential properties can be significantly higher than on non-residential properties, it can be tempting to claim that a property is not a residential property because it is not habitable. However, following the decision of the Court of Appeal in Amarjeet and Tajinder Mudan v HMRC [2025] EWCA Civ 799, HMRC issued a press release warning agents against making refund claims on this basis as most will fail. The case highlights the need to understand when a property counts as a residential property for SDLT purposes.

The decision

In Amarjeet and Tajinder Mudan v HMRC [2025] EWCA Civ 799, the claimants paid SDLT initially at the residential rates but their tax agent submitted a refund claim on their behalf as the property was in a poor state of repair and, as such, the agent advised that it would not count as a residential property. The point at issue was the definition of a residential property for SDLT purposes and whether the requirement that, for a property to be a residential property meant that it must be ‘suitable for use as a dwelling’ meant that the purchaser should be able to move in straight away.

The Court of Appeal rejected the claimant’s appeal, agreeing with the findings of the Upper Tribunal, finding that the fact that, while the property needed some repairs, this did not prevent it from being a residential property. Consequently, SDLT was due at the residential rates.

More specifically, the Court of Appeal upheld the findings of the Upper Tribunal that:

being suitable for use as a dwelling does not mean that the property must be ready for immediate occupation;

it is important to assess the extent to which the property has the fundamental characteristics of a dwelling and whether it is structurally sound;

if the property has previously been used as a dwelling, this will be relevant in determining whether it is suitable for use as a dwelling; and

consideration of whether the defects result in the property no longer having the characteristics of a dwelling is key.

Uninhabitable dwellings

HMRC warn that only a small minority of properties will have deteriorated or been damaged to such an extent that they no longer comprise a dwelling and it will be a question of fact as to whether this is the case. HMRC pursue refund claims made on the basis that a property is uninhabitable and have a high rate of success, and anyone thinking of making such a claim should proceed with caution.

It should be noted that even significant renovations or repairs, such as the temporary removal of bathrooms or kitchens, substantial repairs to walls, doors, windows or roofs, damp proofing, rectifying flood damage or structural repairs, rewiring or replacing a boiler or pipework will not prevent a building from being ‘suitable for use as a dwelling’. Consequently, SDLT remains payable at the residential rates.