A loan note is a kind of IOU from one party to another. Unlike an IOU, a loan note is also a legal contract specifying the duration of the loan, and any agreed interest.
In practical terms they are a useful method of raising funds for commercial purposes, often in property investments or by companies seeking to raise capital.
Loan notes come in different forms. Some are:
- Able to be traded on the stock market
- Either secured or unsecured
Loan Note Terminology
Issuer – The company who has offered the loan note.
Note Holders or Subscribers – The purchaser of the loan note.
Loan Note Instrument – the document laying out the terms and conditions of the loan note, and signed by the issuer.
Loan Note Certificate – This is the official certificate of ownership, much like a share certificate. It is signed by the issuer and the note holder, and constitutes formal evidence of the debt.
Maturity Date – This is the date when the loan must be fully repaid by the issuer.
What is a loan note investment?
Investing in loan notes may be a way to lend money to companies in profitable areas who are willing to offer much higher rates of interest than almost anywhere else.
As such investing in loan notes has been a huge area of growth recently, particularly as the returns from traditional areas of investment has diminished.
They are particularly popular for property developers as they offer a reliable way of raising finance, while the investor gets a level of security if there is a charge over the asset.
What is the Tax Treatment of Loan Notes?
British tax law treats a loan note as a qualifying corporate bond (QCB) or as a ‘non-qualifying corporate bond’ (non-QCB).
QCBs are exempt from Capital Gains Tax while non QCB’s incur CGT, and losses are allowable.