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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: computational rules: credits and debits not brought into account: releases of debt: debt/equity swaps

Release of debt: debt/equity swaps

CTA09/S322(4) provides that a company using an amortised cost basis of accounting for a liability (which will normally be the case) does not have to bring in a credit where a debt is released in consideration of ordinary shares in the company.

‘Ordinary share capital’ takes its meaning from CTA10/S1119 - it is any share capital apart from fixed rate preference shares.

Debt/equity swaps are usually prompted by the debtor company encountering trading difficulties. The transaction may involve the lender becoming the majority shareholder in the business, sometimes with the intention of the shares being held over the long term in the hope that they will increase in value. This may allow the lender to recoup all or part of their loss on the debt.

Sometimes the swap will be part of a wider debt restructuring that may involve sale of the remaining debt and/or the equity stake and the issue of shares to management to incentivise future performance.

CTA09/S322(4) facilitates such debt/equity swaps by removing the additional tax charge on the debtor company that would otherwise result from the release, which would depress the value of the shares and, in effect, inflict a further financial loss on the lender.

For the exemption in CTA09/S322(4) to apply, the release of the debt must be ‘in consideration of’ shares, or an entitlement to shares, in the debtor company. ‘Consideration’ has its ordinary English meaning in this context, rather than being a specialised term of contract law. The question is ‘what is the bargain between the parties’? Can the creditor say ‘I have released this debt because company X has issued these shares to me’? Can the debtor say ‘I have issued these shares because I am being released from the debt’? The answers to these questions will be a matter of fact in any particular case.

See CFM33201 for more on the value of the shares issued in exchange for the debt released.

See CFM33202 for more on the meaning of ‘in consideration of’ shares.

See CFM33204 for more on the meaning of ‘entitlement to shares’.