Intercompany loans: move group cash with real agreements and arm's-length terms

Groups often move cash from one company to another through intercompany loans. The bank transfer itself can take seconds, but the funding still needs legal terms, accounting, interest treatment and tax analysis, especially after the 2026 changes affecting UK transfer pricing and connected-company finance.

Document the borrower, lender, amount and repayment terms

Use a board-approved agreement stating principal, currency, interest, maturity, repayment, security if any and whether the loan is subordinated. HMRC says the absence of a written agreement does not necessarily mean no loan exists, but undocumented funding creates avoidable uncertainty.

Keep the agreement with the bank-transfer evidence so every material intercompany movement has an identified legal basis.

Connected-company finance can require arm's-length pricing

HMRC applies the arm's-length principle to lending between associated enterprises where transfer-pricing rules apply. The analysis asks what amount independent parties could and would have lent and on what terms.

Interest should not be selected merely to move profit around a group. Use borrower credit, currency, maturity and security when supporting the rate.

Use current 2026 guidance for connected-company finance

HMRC manuals updated in 2026 flag reforms to parts of the transfer-pricing and thin-capitalisation framework for relevant periods from 1 January 2026.

Material cross-border or connected-company loans should therefore be reviewed under current rules rather than relying on an old treasury policy or historic benchmark spread.

Use clear legal-entity banking

If Parent Ltd lends £2 million to Subsidiary Ltd, transfer between accounts owned by those legal entities and use a reference identifying the loan or tranche.

Paying subsidiary suppliers directly from the parent's account can blur whether the movement is a loan, capital contribution or expense recharge unless the accounting treatment is defined.

Accrue and settle interest consistently

Set payment dates and whether interest is paid in cash, capitalised or accrued. Ledger entries should follow the agreement rather than an informal expectation between finance teams.

For cross-border loans, consider withholding-tax and treaty issues where relevant. The borrower should know the gross and net cash obligation before payment date.

Reconcile both sides of the balance

Parent and subsidiary ledgers should agree on principal, accrued interest and repayments. Use monthly confirmations for material balances.

A difference can arise where one company posts funding as equity while the other posts it as debt. Resolve mismatches before year end rather than relying on consolidation entries to hide them.

Worked example: Parent Ltd lends Subsidiary Ltd £5 million for three years at a documented market-based rate. The subsidiary records a loan payable, the parent records a loan receivable, and both companies accrue the same interest each month. If only one side books interest, the group consolidation may still eliminate the principal while tax and entity accounts remain wrong.

Review covenant and distribution restrictions before lending cash out of a company. A parent with excess bank cash can still be prevented from lending it if its own facility requires lender consent or minimum liquidity.

Keep board approvals by both entities where governance requires them. Directors of the lending company must consider that company's interests, not assume group ownership automatically makes every transfer appropriate.

Set currency deliberately. A sterling parent lending dollars to a US subsidiary creates an FX position for one or both entities depending on functional currency and accounting. The loan currency should fit the borrower's cash flows or be hedged rather than chosen only because the parent happens to hold that currency.

Monitor intercompany debt alongside dividend capacity. A subsidiary can repay a loan only if it has cash and legal ability under local rules, while a dividend can require distributable profits. Treasury should not assume the two funding routes are interchangeable simply because both move cash back to the parent.

Document amendments formally. Extending maturity, capitalising interest or changing currency can alter transfer-pricing, tax and accounting outcomes. Email agreement between finance managers is weak evidence for a material connected-party loan.

For long-term group funding, decide whether a loan is genuinely more appropriate than equity. Debt can create interest deductions and repayment flexibility but also leverage, withholding and thin-capitalisation issues. Equity can be more permanent but less easily returned. Treasury and tax should choose deliberately rather than default to whichever journal is easiest.

Use cash settlement dates consistently. If one entity accrues interest monthly but pays annually, the other entity should mirror the same accrual and payment timing. Mismatched cash and accounting calendars are a common source of unexplained intercompany differences.

Set a formal repayment waterfall where several group loans exist. A subsidiary owing the parent, a treasury company and another sister company should know which balance is repaid first and whether any lender is subordinated. Without priority, cash can move based on convenience rather than the documented financing structure.