Investors already have capital in the business and therefore to balance working capital cashflow yet ensure a sufficient return on the additional capital invested, we sometimes see a redemption premium asked for. While we understand the commercial driver for such a feature, it can often create an unexpected tax issue for investors.
This is because when a redemption premium exceeds a low bar (broadly 0.5% per year) the loan can be classed as a qualifying corporate bond (QCB). The impact of being a QCB is that the loan note is exempt from capital gains tax for investors who are individuals. This might sound good but the corollary effect is no capital loss relief is available if the loan goes bad.
In our experience, investors are often concerned about preserving downside protection through being able to claim a tax deduction where they have incurred a capital loss. So rather than seek return through premiums, they might consider other options such as:
Investors should review the terms of the current loan notes they hold or any future loan notes to be issued to assess the QCB or Non-QCB position and whether downside protection is available. Where problem loan notes are identified taking professional advice to identify any corrective actions should be sought.
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