Section 809BZF: Type 2 finance arrangement defined
1133.This section defines a form of arrangement, labelled a “type 2 finance arrangement”, which falls within this legislation. It is based on section 774C(1) to (3) of ICTA.
1134.A type 2 finance arrangement works like this.
	Under the arrangement, a transferor disposes of an asset to a partnership.
	This partnership is one of which the transferor is a member immediately after that disposal – it does not matter whether it was a partner before the disposal.
	The partnership receives an advance from a lender.
	The accounts of the partnership record in accordance with GAAP for that period a financial liability in respect of the advance.
	There is a “relevant change” in relation to the partnership. Broadly speaking, a “relevant change” affects the lender. Either the lender (or a person connected with the lender) becomes a member of the partnership, or else there is a change in the profit share of the lender (or of a person connected with the lender). See section 809BZG.
	The share of the lender (or other person involved in the relevant change) in the profits of the partnership is determined (wholly or partly) by reference to payments in respect of the asset disposed of.
	In accordance with GAAP the payments reduce the amount of the financial liability.
1135.The lender’s advance is thus made in the form of a contribution to the partnership and its profit share is such that payments are made to it which repay that contribution together with interest. Once the repayment with interest has been made it is likely that there are arrangements under which the lender ceases to be a member of the partnership or to share in the profits of it.
1136.If the relevant change would (but for section 809BZH) have the “relevant effect” (as defined in subsection (3) of that section), then that section negates the relevant effect.
1137.Subsection (1) provides that two conditions must be met if an arrangement is to be a type 2 finance arrangement.
1138.Subsection (2) specifies condition A, which concerns the terms of the arrangement. There are five tests in condition A, all of which must be passed if the condition is to be met.
1139.Subsection (3) specifies condition B, which is about accounting. To summarise, the payments mentioned in subsection (2)(e) must be, for accounting purposes, payments of principal rather than interest.