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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: group continuity: degrouping: avoidance

Group continuity avoidance

Some companies with loans or derivative contracts having a market value in excess of their historic cost and accounts carrying value sell the contracts or loans at full value to a partnership of which the members are fellow group companies. This gives rise to an accounting profit to the transferor but, it is claimed, this profit will not be taxable because of the operation of CTA09/PT5/CH4.

Subsequently, or as part of the arrangements, another company joins the partnership in return for making a capital contribution equal in value to the asset transferred to the partnership. The new partner then becomes entitled to virtually all of the profits of the partnership including any rights in respect of the loan. It is claimed that no tax charge arises despite the fact that, in economic terms, the loan has been transferred to the new partner.

Finance Act 2008 inserted new rules to address this form of avoidance with effect for transactions taking place, or a series of transactions of which the first takes place, on or after 16 May 2008.

Section 347 provides that CTA09/PT5/CH4 will not apply to a transfer of a loan relationship to another company in the same group where:

  • the transferor company is party to arrangements giving rise to a likely transfer by the transferee company of rights or liabilities under the loan relationship to another person where S336 or S337 would not apply, and
  • the purpose, or one of the main purposes, of the arrangements is to secure a tax advantage for the transferor company or a person connected with that company.

Also, Chapter 4 will not apply to a disposal where CTA09/S455 applies to that same disposal.

The following words or phrases appearing above are defined as follows for the purposes of this rule:


‘Arrangements’ includes any agreement, understanding, scheme, transaction or series of transactions.


‘Connected’ in this context takes its meaning from CTA10/S1122.

Tax advantage

‘Tax advantage’ has the meaning given to it by CTA10/S1139


‘Transfer’ includes any arrangements that amount in substance to a transfer. It also includes an acquisition or disposal or an increase or decrease in a share of the profits or assets of a partnership.