CFM34090 - Loan relationships: group continuity: transfers of connected party debt

Connected party debt

CTA09/PT5/CH4 applies only where the transferor and transferee are members of the same group: any ‘connection’ between the parties to the loan relationship within the connected company rules (CFM35000) is irrelevant. However, it is common for group members to transfer intra-group loans.

The connected company rules normally restrict a profit or loss on a related transaction, such as a disposal, of a connected person’s loan (CTA09/S350 - CFM35000). But where

  • a loan relationship is held between two companies in the same group, and
  • the loan relationship is transferred to another group company,

The group continuity rules apply to ignore the transfer. So there is no profit or loss to restrict under S350.

In order to arrive at the ‘notional carrying value’ of a loan relationship that is transferred, the carrying value for accounting purposes is adjusted for the effect of tax provisions, including the connected party rules. Thus an intra-group transfer will not crystallise an impairment loss in the form of a realised loss. See the example at CFM34100.

Where a transferor company uses fair value accounting for the loan relationship being transferred, S340 does not apply, and S341 applies instead (CFM34070). But if the loan relationship is with a connected party, CTA09/S349(2) requires the use of an amortised cost basis of accounting for tax purposes, over-riding the actual accounting treatment. It is therefore S340 which applies in these circumstances, rather than S341.