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HMRC internal manual

Corporate Finance Manual

Loan relationships: group continuity: the basic rule: an example

Group continuity: the basic rule: an example

JH Ltd and IK Ltd are both members of the same group of companies, using an amortised cost basis of accounting with a 31 December accounting date.

JH Ltd lends a third party, B Ltd, £10,000 at 10% interest per annum for a period of 5 years (assume interest accrues in a straight line for the purposes of the example).

JH Ltd sells the debt to IK Ltd for £10,500 after 9 months of Year 1.

At the end of the 5-year term, B Ltd can only repay £7,000 and IK Ltd writes off the balance.

Under the group continuity rule, the profit of £500 that JH Ltd makes on the sale is ignored. However, its taxable credits include £750 interest accruing on the loan.

IK Ltd is treated as acquiring the debt at £10,000. It brings in accrued interest of £250 in Year 1, and £1,000 in each of the following four years.

At the end of Year 5, IK Ltd brings in a loss of £3,000 as a debit: the difference between the original cost and the amount repaid