Introduction Overview Overview Section 763: Type 2 finance arrangement defined
2313.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.
2314.A type 2 finance arrangement works like this.
	Under the arrangement, atransferor disposes of an asset to a partnership.
	This partnership is one of which the transferoris a member immediately after that disposal – it doesnot matter whether it was a partner before the disposal.
	The partnership receivesan advance from a lender.
	The accounts of the partnership record inaccordance with GAAP for that period a financial liability inrespect 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 764.
	The share of the lender (or other person involved in the relevant change) in the profits of the partnership is determined (wholly or partly) byreference to payments in respect of the asset disposed of.
	In accordance with GAAP the payments reduce the amount ofthe financial liability.
2315.The lender’s advance is thus madein the form of a contribution to the partnership and its profit shareis such that payments are made to it which repay that contributiontogether with interest. Once the repayment with interest has beenmade it is likely that there are arrangements under which the lenderceases to be a member of the partnership or to share in the profitsof it.
2316.If the relevant change would (but for section 765) have the “relevant effect” (as defined in subsection (3) of that section), then that section negates the relevant effect.
2317.Subsection (1) provides that two conditions must be met if an arrangement is to be a type 2 finance arrangement.
2318.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.
2319.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.