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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: credits not brought into account: releases of debt: debt/equity swaps: debt for equity swaps on or after 9 November 2009

Debt equity swaps on or after 9 November 2009

CFM33200 explains that CTA09/S322(4) provides an exemption from the taxable credit that would normally arise where a debt is released in consideration of ordinary shares in the company.

CTA09/S322(4A) qualifies this where the release is a ‘release of relevant rights’ under CTA09/S358(4), and takes place on or after 9 November 2009.

A ‘release of relevant rights’ arises where a connected company acquires the impaired debt of a connected company. Normally in such cases the debtor is subject to a credit in respect of a ‘deemed release’ on the difference between the face value of the debt and the amount paid by the connected creditor to acquire it (CFM35440). However, there are exemptions from the charge where the debt acquisition is part of a corporate rescue or a debt-for-debt exchange. If the debt is then released by the connected creditor, the amount that would have been brought in on the debtor as a ‘deemed release’ now crystallises as a ‘release of relevant rights’. CFM35520 explains this further.

If a creditor company releases a connected debtor from a debt in consideration of the issue of ordinary shares by the debtor, and the debt is one that would have been subject to a tax charge on a release of relevant rights under CTA09/S358(4) had it simply been released, then CTA09/S322(4A) ‘switches off’ the normal exemption in section 322 for debt-equity swaps. In effect a company cannot escape the charge on a ‘release of relevant rights’ by using a debt-equity swap.

If such a release occurs after connection ceases, the normal operation of the loan relationships rules will give the result in the taxation of the same amount of the discount that would have been taxed had the parties remained connected, and no special rules are needed to determine the amounts brought into account.


In the example at CFM35525, KJ Ltd pays £40,000 for debt with a face value of £100,000 owed by DS Ltd, and becomes connected with it. Normally a credit of £60,000 would be imposed on DS Ltd in respect of a ‘deemed release’, but if the ‘corporate rescue exception’ were to apply there is no deemed release under CTA09/S361. However, if KJ Ltd subsequently releases DS Ltd from its debt, DS Ltd will be taxed on a ‘release of relevant rights’ of £60,000 under CTA09/S358(4).

CTA09/S322(4A) ensures that a release of relevant rights will also arise if, instead of simply releasing the debt, KJ Ltd were to accept ordinary shares in DS Ltd in exchange for the debt.