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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: group continuity: fair value accounting: examples

Examples of the group continuity rule where fair value is used

Example 1

Company C has lent £1m to a connected party company D. Company C accounts for the loan relationship asset at fair value but calculates the loan relationship debits and credits on the basis of amortised cost. In 2008 the fair value of the loan falls to £900,000 which would give a loan relationship debit of £100,000. But because company C has to use an amortised cost value for the loan the difference in value is disregarded because the amortised cost of the loan remains at £1m.

In 2009 the loan is transferred to another group company - company E.

Company C brings the debits and credits in respect of the loan relationship into account on an amortised cost basis. Because the loan relationship debits and credits are accounted for an amortised cost basis the loan relationship is not removed from the group continuity rules by CTA09/S339.

The transfer of the loan relationship from company C to company E will be shown in both companies’ accounts at the notional carrying value (see CFM34050) and any profit or loss in the accounts of company C arising from the transfer are ignored for tax purposes.

Example 2: discounts

Company A sells on day one to a fellow group company B a loan relationship having a fair value of £100 (and for which it paid £100) for £105 payable in 1 year’s time. The difference of £5 represents a commercial rate of interest for the deferred payment period and constitutes a ‘discount’ within the meaning of CTA09/S480(5), see CFM41060.

S340(5) provides that the consideration received by company A is deemed to be increased by the discount of £5, hence a taxable loan relationship credit of £5 arises to company A on the transfer. However, this has no effect for company B which is treated under S341(5) as if it had acquired the loan from company A for company A’s notional carrying value of £100.