What are Loan notes?

futurecut

Hi all,

My mother had shares in Scottish Radio Holdings which was bought out by Emap, so has now to take the value of these shares. (225K, couldn't believe it!). Her IFA (whos other shares portfolio lost 60%+ of its value) has suggested she take some or all as loan notes to offset CGT. What are they and what are the pro's and cons? I'm not too tax savvy so we're trying to avoid being bitten.

Thanks in advance.

Futurecut

MJSW

Loan notes are effectively just IOUs issued by the company making the takeover. Your mother will be able to cash them in at intervals set out in the terms and conditions of the note (usually every 6 or 12 months). They usually pay interest which is linked to interbank rates on the London market.

They are frequently used in takeover offers because the capital gain is deferred until the loan notes are redeemed. You can therefore redeem of a few each tax year to make use of several years worth of Annual Exemptions.

I would advise her to check whether the loan notes are guaranteed by a bank. It's all very well having a promise by EMAP to pay the amounts due, but if EMAP go bust then she could lose out. Because of this many loan note offers are guaranteed by a bank for extra security.

futurecut

thanks for that, much obliged

OISEAU

I would like to know if loan notes can be used when buying a partnership business as a means of linking payments to future profitability?

If the loan notes are unconditional, can HMRC argue that the gain crystalised on the date of sale, regardless of the payment structure and tax the transaction accordingly?

richard.gemmill

I purchased shares and loan notes in my company, that I used to work for. The loan notes and shares were held in a holding company. The loan notes were for a 10 year term, with interest payable upon expiry or floatation!
The trading company has since had a pre pack administration done on it. It has no means of refunding the holding company & effectively I have lost my investment.

I wanted to know if I can offset the original value of loan notes (or even better the loan notes plus the interest that would have accumulated on them) against my income tax?
I already have capital losses from previous investments, but because these are loan notes, not shares, I hoped I might be able to do something different with them?

Any suggestions would be welcome.....