Payment is taxable

Loan relationship scheme fails

Greene King plc loaned £300m to GKB a wholly-owned subsidiary in 2000. At the same time GKB created unsecured loan stock with a nominal value of £300m which was issued to Greene King as security for the loan.

In 2003 Greene King plc assigned its right to receive the interest on the unsecured loan stock in exchange for preference shares carrying a special initial dividend issued by another subsidiary GKA.

GKB paid loan interest to GKA. However Greene King plc retained the right to receive the repayment of the £300m.

HMRC said that the purpose of the arrangements was to take advantage of a loophole in the loan relationship rules. The aim was to make a tax saving by allowing GKB to claim a deduction for the interest payable without Greene King plc or GKA being taxed on the...