CFM31077 - Loan relationships: related transactions: transferring and extingushing loan relationships
CTA09/S304(2)
Types of transfer
Transfer of assets
A company can transfer a loan relationship (or, more generally, its rights under a loan relationship) by transfer or extinguishment applying a number of mechanisms. These include the methods listed in CTA09/S304(2):
- sale
- gift
- exchange
It is possible, however, that the terms and conditions of the debt will not allow this; for example some debt may be non-transferable.
In some circumstances the company may be required to assign its rights by operation of law rather than by bargain, for instance a compulsory exchange of securities in consequence of a takeover or reorganisation.
Transfer of liabilities
Under English law, liabilities cannot be assigned from the original debtor to another. This protects the right of the holder of the creditor relationship from the substitution of a financially debtor that might be financially weaker than the original debtor.
The obligations to make a payment may be may be delegated or sub-contracted by the debtor (defeasance) but, in the absence of some contractual arrangement with the creditor, this will not free the debtor from its primary obligation. Normally the only way to transfer the obligations under a contract, completely, is by novation.
Novation
Liabilities can be transferred under English law and the law of many other jurisdictions under an operation of law called novation. A novation involves substituting a new debt for the original debt, where the lender remains the same person but the debtor is usually different. The agreement will be tripartite as it is inherent in the arrangement that the creditor accepts the substitution of the debtor. Novations may arise, for instance when companies are restructuring.
Transfers under repos and stock loans
Before amendments made in FA07, transfers of loan relationships under repos and stock loans were not treated as related transactions. This was replaced by rules that, for instance, require amounts to be brought into account, even though a company was no longer party to a loan relationship, but amounts were brought into account in respect of that relationship, under GAAP. For guidance on these rules see CFM33290. CFM46000+ has more on the special tax rules that apply to repos and CFM74100+ explains stock lending.
Possible asymmetry between creditor and debtor loan relationships
Loan relations are defined by a reference to a company’s relationship with a money debt. A money debt will typically therefore give rise to a creditor relationship and a debtor relationship. The transfer of a creditor relationship from one company to another is clearly a related transaction for the creditor and consideration would normally pass from assignee to assignor.
However, the debtor relationship is essentially unchanged, particular in the case of a freely-transferable debt security. From the debtor’s point of view there is typically no related transaction at all, because the only thing that has changed is the identity of the creditor. This should have no financial consequences for the debtor, so even this is a related transaction, no consideration would be expected and no transfer pricing adjustment or adjustment under s444 would be expected - see guidance starting at CFM38410.
The position would be different if the debt is under its terms non-transferable, but the debt was novated. In this case the original debt is extinguished, so there is a related transaction from the debtor’s and original creditor’s perspectives, and a new debtor loan relationship created.
Difference between waiving and writing off a debt
A company that formally waives a debt, releasing the debtor from its obligation to pay, is no longer party to a loan relationship. This disposal is a related transaction.
A company may simply give up pursuing a debt, and write off the debt in its books. This does not involve extinguishing a debt and is not a related transaction. For guidance on impairment and debt releases see CFM33190 onwards.