Tax Journal

Ask an expert: Taxation of a redemption premium

10 January 2014

Nigel Giles answers a query on the taxation of a redemption premium.

Question

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?

Answer

The fact that the loan was assignable suggests that it was marketable, which in turn would suggest that it was a debt on a security. If so, it would meet ...

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