My client was a minority shareholder in a trading company which required a short-term cash injection prior to being sold. My client and the other shareholders were approached for funding and made loans on terms which included a ‘redemption premium’ based on 3% of the sale proceeds apportioned between the lenders on the basis of the sums lent. The loan terms also included a right of assignment. The company has now been sold and my client received £18 000 comprising the repayment of his loan (£6 500) and the redemption premium of £11 500. It appears that the rather unusual terms were agreed in the hope that the premium would be treated as capital which I find difficult to substantiate. How is the premium likely to be treated for tax purposes?
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