There is a UK tax regime that applies to your company’s bank account. It also applies to any term deposits, money-market funds or foreign-currency cash balances the company holds. Most company owners don’t know this until their accountant mentions it — usually after the first year of meaningful cash sitting around. This post explains what that regime is, what it does, and why the form in which the company holds cash changes the tax answer.

Most company owners think of the cash in their company’s current account as inert — money sitting there, doing nothing, waiting to be deployed. The UK tax system disagrees. If the cash earns any interest, that interest is taxable as it accrues, regardless of when it’s paid out, as a non-trading loan-relationship credit under Part 5 of CTA 2009. If it sits in a money-market fund, the distribution may be taxed as interest rather than as a dividend, depending on what the fund holds. If it’s held in a foreign currency, the exchange-rate movement is taxed every year as the fair-value gain or loss flows through the accounts. None of these are neutral. This post walks through what’s actually happening to your company’s idle cash.

In brief:

  • Cash held by a UK company is not tax-neutral: the interest it earns sits inside the loan-relationships regime — Part 5 of CTA 2009 — and is taxed as it accrues in the accounts, not when it arrives in the bank.
  • Bank interest is a non-trading loan-relationship credit (NTLR credit) — taxed at the company’s corporation-tax rate for that period.
  • Money-market funds look like funds, but under the bond-fund rule (CTA 2009 ss.490, 493) they are often taxed as interest, not as fund distributions, if more than 60% of their assets are interest-bearing.
  • Foreign-currency cash is a monetary item — the exchange-rate movement is retranslated every accounting period and taxed as it arises, even if the cash sits untouched.
  • The form in which the company holds its cash — current account, term deposit, money-market fund, foreign currency — changes the tax answer. The numbers are for your accountant to run; this post names the mechanisms.

The regime that applies to company cash

When a company holds cash in a bank account, it is a creditor of the bank — the bank owes it a money debt. A debt of that kind, arising from placing money with an institution, is a loan relationship under CTA 2009 s.302, which defines a loan relationship as a creditor or debtor position in a money debt arising from a transaction for the lending of money. HMRC’s Corporate Finance Manual indexes the definitional framework at CFM33010.

For a company holding bonds, gilts, term deposits and cash balances, every one of those positions is a loan relationship. The loan-relationships regime post covers that framework end-to-end — the mechanics, the s.464 priority over chargeable gains, the deficit-relief structure. This post’s job is narrower: what the regime means specifically for cash, in the hands of a company owner who has cash sitting around. What happens when interest arrives. What happens when the cash is in a money-market fund. What happens when it’s in a foreign currency.

Bank interest: taxed as it accrues, not when you get it

Here is the move most owners miss. When a UK company earns interest on a bank account or term deposit, the tax does not wait for the interest to be paid out. It arises as the interest accrues.

This follows from the regime’s defining structural feature: it follows the accounts. CTA 2009 s.307(1) states that “this Part operates by reference to the accounts of companies and amounts recognised for accounting purposes.” The general rule in s.307(2), read together with s.306A(1) — which was inserted by Finance (No.2) Act 2015 and is the current operative provision — directs that the amounts brought into account are those recognised in profit or loss for the period in respect of the company’s loan relationships, including interest. The tax follows what the accounts show; the accounts show accrued interest, not just cash interest received.

The result: if a company places £100,000 in a 12-month fixed-rate deposit on 1 October and its accounting year ends on 31 December, it has accrued three months of interest by 31 December. That three months of interest is a non-trading loan-relationship credit (an NTLR credit — the term for interest income received from lending as an investment, not as part of a trade) for the period ending 31 December. It is taxable in that period, at the company’s corporation-tax rate, even though the cash has not yet been received and will not arrive until the following October. The later cash receipt settles the receivable; it is not itself a second credit.

For a plain current account or notice account this is the whole story: interest accrues, it appears in the accounts, it is an NTLR credit. No pool. No chargeable gain. The regime is genuinely simple at this end of the spectrum — the complexity lives elsewhere.

What is a money-market fund, and why does it matter?

A money-market fund (MMF) is a collective investment vehicle — legally, a fund — designed to hold very short-term, highly liquid, interest-bearing assets and provide investors with a return that tracks money-market rates. The economic experience of owning one is very similar to holding a bank deposit: the cash earns a rate, the unit price is broadly stable, and the return comes through as distributed or rolled-up income.

The tax experience is not the same.

An MMF is legally a fund, not a deposit. The company owns units in a fund vehicle, not a direct claim on the underlying assets. That legal form matters because fund holdings and deposit holdings sit in different parts of the tax code. Fund income is ordinarily taxed as a distribution. Interest is taxed under the loan-relationships regime. If the company holds an MMF and receives what it calls a distribution, it might expect dividend treatment — or at least the possibility of exemption under the dividend-exemption rules.

The bond-fund rule unsettles that expectation.

The bond-fund rule: when an MMF distribution is taxed as interest

CTA 2009 ss.490 and 493 contain what is usually called the bond-fund rule (or the “qualifying-investments test”). Under s.493, a fund fails the qualifying-investments test if the market value of its qualifying investments — broadly, interest-bearing assets, including money placed at interest, debt securities, alternative finance arrangements, and derivatives whose underlying is such assets — exceeds 60% of the market value of all its investments at any point during the period.

When a fund fails that test, s.490 steps in: the company’s holding in the fund is treated as a creditor loan relationship for corporation tax. The company’s return on it — income and fair-value movements — is brought into account as non-trading loan-relationship credits and debits, on a fair-value basis. Not as a fund distribution. Not as a chargeable gain. As loan-relationship income.

Now: a money-market fund invests almost entirely in short-term interest-bearing assets. That is what it is designed to do. An MMF holding government bills, bank deposits, and short-dated commercial paper is likely to be holding well over 60% qualifying investments by design. The bond-fund test is not an edge case for MMFs — it is frequently the expected outcome, because the fund’s mandate is precisely to hold interest-bearing assets.

This creates a significant divergence between economic form and tax form:

  • A company holds a term deposit. The interest accrues as an NTLR credit. The tax treatment is simple.
  • A company holds an MMF with identical economic returns. If the bond-fund rule applies, the fair-value movements and income are NTLR credits and debits — taxed as loan-relationship income rather than fund income. If the rule does not apply (because the fund passes the 60% test), the MMF sits in the fund regime with its own mechanics.

This determination is not one an owner can make from the fund’s name. “Cash Fund”, “Liquidity Fund”, “Money Market Reserve” tell you nothing reliable about whether the 60% test is met. Whether a specific fund fails the qualifying-investments test depends on its actual portfolio composition, which requires the fund’s documentation and an accountant’s review. Portive flags this as a per-fund determination at instrument setup rather than auto-resolving it, for exactly this reason.

For the same reason: if your company holds units in an MMF that is structured as an offshore fund (many institutional MMFs are Dublin- or Luxembourg-domiciled), there is a further layer of classification — reporting vs non-reporting fund status — that affects whether the return is taxed annually or at disposal. That layer is set out in a forthcoming piece on reporting vs non-reporting funds. The bond-fund determination comes first; it may override the offshore-fund analysis entirely.

Foreign-currency cash: the exchange rate moves every year

If the company holds cash in a foreign currency — US dollars, euros, or any other non-sterling balance, whether in a bank account or sitting in a broker account as uninvested cash — it holds a monetary item. A monetary item is one that represents a right to a fixed or determinable number of units of currency: cash and deposits are the clearest case, because the company is simply owed a number of currency units.

The accounting and tax consequence of being a monetary item is annual retranslation. Under FRS 102 para 30.9(a) and FRS 105 para 25.5(a), a foreign-currency monetary item is translated at the closing rate — the spot rate at each reporting date. The exchange difference arising in the period is recognised in profit or loss. And because that difference arises on a loan relationship (the foreign-currency cash is a money debt), CTA 2009 s.328 brings it into the loan-relationships regime: the exchange gain or loss is a non-trading loan-relationship credit or debit for that period.

The practical consequence: if a company holds USD 100,000 in a broker cash account and sterling strengthens against the dollar over the company’s accounting year, the company recognises an exchange loss on that cash balance. That loss is an NTLR debit — it flows through the accounts and into the CT computation for the period. If sterling weakens, the gain is an NTLR credit, taxable then and there, even though the cash has not been touched, no trade has been done, nothing has happened except the exchange rate moving.

This is exactly the mechanism the FX monetary/non-monetary fork post describes for foreign-currency bonds: a monetary item is retranslated every period, and the FX is taxed as it accrues. Cash is the simplest case of that rule — no coupon, no maturity, no discount or premium to unwind. The period-end exchange difference is the full tax figure for that cash balance in that period. A sterling cash balance produces no FX line at all.

The contrast with a foreign-currency equity is the teaching point. A USD-listed share is a non-monetary item: its value floats with the underlying equity price, it is not a right to a fixed number of currency units. FX on it is not taxed annually. It accumulates silently during the holding period and crystallises, embedded in the sterling chargeable gain, only at disposal. Foreign-currency cash and foreign-currency equities are taxed on completely different timescales — and the FX fork post shows why.

Why the form of the cash holding changes the tax answer

Here is the summary of what happens when a company holds the same economic resource — call it “idle money earning a money-market return” — in different forms:

A term deposit is a direct creditor loan relationship. The interest accrues each period as an NTLR credit, following the accounts. Simple.

A money-market fund is a fund holding. Whether the return is taxed as fund income or as loan-relationship income turns on the bond-fund determination for that specific fund. If the fund fails the 60% qualifying-investments test — as many MMFs will by design — the income and fair-value movements are NTLR credits and debits. If it passes, the fund mechanics apply instead.

Foreign-currency cash is a monetary item. The exchange-rate movement is an NTLR credit or debit every period, whether or not the cash is touched. A year of sterling appreciation against the currency in which the cash is held will produce an NTLR debit for that period.

Sterling bank interest (from a current account or term deposit) is an NTLR credit, taxed as it accrues. The only difference between a current account earning nothing and a deposit account earning interest is whether there is a credit to bring into account; the underlying mechanism is the same.

The after-tax position on any of these depends on which one the company holds, what the fund documentation says (for an MMF), what the exchange rate does (for foreign-currency cash), and what accounting framework the company uses. Your accountant can work through the numbers. The point of this post is that the numbers are not zero, and the form the holding takes is not irrelevant.

Sources

Legislation

  • CTA 2009 s.302 — loan relationship and money-debt definition. legislation.gov.uk
  • CTA 2009 s.306A — matters in respect of which amounts are brought into account (inserted by Finance (No.2) Act 2015). legislation.gov.uk
  • CTA 2009 s.307 — general rule: “this Part operates by reference to the accounts.” legislation.gov.uk
  • CTA 2009 s.313 — basis of accounting: amortised cost and fair value. legislation.gov.uk
  • CTA 2009 s.328 — exchange gains and losses arising from loan relationships, brought into account as NTLR credits/debits. legislation.gov.uk
  • CTA 2009 s.490 — treatment of holdings in bond funds as creditor loan relationships (fair-value basis). legislation.gov.uk
  • CTA 2009 s.493 — the qualifying-investments test: a fund fails if qualifying investments exceed 60% of all investments. legislation.gov.uk

HMRC manuals

Accounting standards

  • FRS 102, Section 30 — Foreign Currency Translation, para 30.9(a) (monetary items at closing rate) and para 30.10 (exchange differences in profit or loss). September 2024 edition. Financial Reporting Council.
  • FRS 105, Section 25 — Foreign Currency Translation, para 25.5(a) and para 25.6. September 2024 edition. Financial Reporting Council.

Last reviewed: 2026-06-01.