Taxation of loan transfers

This article seeks to outline the UK tax consequences of loan transfers. These transactions are the bread and butter of banking lawyers. However the commercial effects and tax consequences do not always dovetail can pull in opposite directions and may produce unexpected results. Hence banking lawyers may overlook tax aspects and tax lawyers may overlook commercial aspects.

Loan transfers

There are four recognised methods of debt transfer.

1. assignment;

2. novation;

3. sub-participation; and

4. risk participation.

Creditors commonly wish to transfer the whole of part of their loan asset for one of three reasons:

(i) to decrease exposure to a single borrower;

(ii) to diversify assets; and

(iii) to shrink the balance sheet to accord with capital adequacy requirements.

For (iii) to be achieved the...