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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: group continuity: transfers of connected party debt: example

Transfer of connected party debt: example

G (Finance) Ltd has made a loan of £4m to a fellow group company, G (Trading) Ltd. In its accounting period year ended 31 March 2007, it transfers the loan to another group member, F Ltd. G (Finance) Ltd accounts for the loan on an amortised cost basis. At 31 March 2006, it assessed the debt asset for impairment, and recognised an impairment loss of £1m, which, by virtue of CTA09/S350(1), was not allowed for tax purposes.

G (Finance) Ltd sold the loan to F Ltd for its fair value of £2.5m, thus debiting a further £500,000 in its accounts. But, for the purposes of S338, the actual sale price is ignored. The carrying value of the loan is determined in accordance with CTA09/S314 to S317: in particular, it is adjusted for the effect of S350. This means that no impairment loss is recognised, and the carrying value is £4m. Hence there is no gain and no loss to G (Finance) Ltd on disposal of the loan, and F Ltd is treated as having acquired it for its full face value, £4m.

F Ltd, having acquired the asset at a discount to face value may - if it also accounts for it on an amortised cost basis - amortise the £1.5m discount over the remaining term of the loan. Credits, so far as they are attributable to this amortisation, are ignored for tax purposes. This is not because they represent reversal of an impairment loss on connected party debt - the impairment happened before F Ltd acquired the loan - but simply as a consequence of the statutory fiction that F Ltd acquired the loan for £4m.