Taxes Consolidation Act 1997 section 249

Rules relating to recovery of capital and replacement loans

Section 249 sets out anti-avoidance rules that restrict tax relief on loan interest where the borrower recovers capital from the company in which the loan proceeds were invested, or from a connected company, without using the recovered capital to repay the loan.

• Where a borrower recovers capital from the invested company (or a connected company) without repaying the loan, interest relief is restricted by the amount corresponding to the capital recovered — effectively treating the borrower as having repaid that amount out of the loan.
• Capital is treated as recovered where the borrower sells shares in the company, receives repayment of a loan or advance, or assigns a debt owed by the company — and where shares are disposed of below market value, the market value is used instead.
• Where the invested company is a holding company, the borrower may be deemed to have recovered capital if the holding company (or an intermediate holding company in the group) recovers capital from a subsidiary without applying it for approved purposes such as repaying the borrower's loan or re-investing in qualifying companies.
• Certain recoveries are exempt from these restrictions, including repayments of specified loans (pre-6 February 2003 loans, trading loans, or rental business loans), capital used to repay another qualifying loan, and transfers of assets between intermediate holding companies carried out for genuine commercial reasons.