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HMRC internal manual

Corporate Finance Manual

Loan relationships: group continuity: degrouping: conditions

Conditions for the degrouping rule to apply

Where a company leaves a group and there has been an intra-group of a loan relationship in the previous six years, CTA09/S345 deems there to be a disposal and reacquisition of the loan relationship at fair value, but only if one of two conditions is satisfied.

Condition 1

The first condition is that the amount brought into account as a result of the deemed disposal is a credit. The aim of S345 is to ensure that the full fair value profit on a loan relationship is taxed when it leaves a group, not to allow losses to crystallise.

Condition 2

The second condition is designed to ensure parity of treatment between a loan relationship and a derivative contract that is being used to hedge it. For this second condition to apply,

  • the transferred loan relationship must be a creditor loan relationship (an asset)
  • the effect of a deemed disposal at fair value would be a debit, but
  • there is a hedging relationship between a derivative contract and the creditor loan relationship, and
  • when the transferee company leaves the group, a credit is brought into account under CTA09/S631 - the derivative contracts equivalent of S345.

‘Hedging relationship’ takes its meaning from CTA09/S707. It will include, but is not restricted to, situations where a hedge has been designated for accounting purposes.

Thus, suppose in example 2 at CFM34080, the loan relationship asset was a bond paying fixed rate interest. A Ltd, while it held the bond, entered into an interest rate swap to hedge the bond, and the swap was novated to B Ltd at the same time as the bond was transferred. When B Ltd leaves the group, interest rates have risen and as a result the fair value of the bond is only £900,000. But there has been a corresponding rise in the fair value of the swap, which now stands at a fair value of £100,000.

The effect of CTA09/S631 is to bring into account a fair value profit of £100,000 - B Ltd is, for tax purposes, treated as having acquired the swap for nil, its original cost to A. So a deemed disposal at fair value results in a credit of £100,000. But in economic terms, the position is balanced. It is therefore reasonable to allow B Ltd to bring into account the corresponding debit of £100,000, resulting from a deemed disposal of the bond at its fair value of £900,000.