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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: group continuity: the rule before 16 March 2005

Transfers before 16 March 2005

The rules in CTA09/PT5/CH4 were formerly in FA96/SCH9/PARA12.

Where the transfer of a loan relationship takes place before 16 March 2005, the group continuity rules operate to ignore the transfer for the purposes of calculating the debits and credits arising as a result of the transfer, by deeming the transferor and transferee company to be the same company. As a result

  • there can be no profit or loss for the transferor
  • the transferee inherits the transferor’s loan relationship value for the purposes of calculating the debits and credits on any subsequent related transaction (such as repayment or a further disposal outside of the group). For a simple debt acquired at par, this value will generally just be cost. If the company acquired the debt at a discount, the transfer value for the purposes of Chapter 4 will reflect the discount accrued by the transferor to date.

Transfers before 16 March 2005: connected party debt: example

TY Ltd lends £900,000 to fellow group member YH Ltd. TY Ltd then sells the debt to another group member, UF Ltd, for £800,000. UF subsequently sells the debt to an unconnected third party, KJ Ltd, for £700,000.

Because TY Ltd and YH Ltd are connected under CTA09/S346 (formerly FA96/S87), CTA09/S350 (formerly FA96/SCH9/PARA6) would apply to restrict TY Ltd’s loss on disposal to the loss that would arise had there been no disposal - in other words, nil. The purchasing company, UF Ltd, would bring in the debt at the acquisition price, £800,000.

But FA96/SCH9/PARA12 ignores the transfer and has precedence over FA96/SCH9/PARA6, so

  • TY Ltd and UF Ltd are deemed to be the same company
  • there is still no loss on disposal arising to TY Ltd, UF Ltd brings the loan into its accounts at £900,000
  • UF Ltd, when the debt is repaid or sold on, brings in the original cost of £900,000 in computing the debits and credits under CTA09/S291.

However, as UF Ltd is connected to the debtor, the rules in S350 will apply to restrict any loss (see CFM35170). The actual debit is £200,000 - £900,000 less sale proceeds £700,000. The debit under CTA09/S350 assuming no disposal is nil. Taking the smaller of the two figures, there is no debit to be brought in.

Transfers before 16 March 2005: transferor company using fair value accounting

FA96/SCH9/PARA12 did not apply in the same way where the transferor company uses an authorised mark to market basis when accounting for the loan relationship. In this case, rather than ignoring the transaction, the transferee company brings in the loan relationship at fair value.

In cases where the transferee becomes party to the loan relationship on or after the 9 April 2003 the transferor has to bring into account the fair value of the loan relationship as at the date the transferee became a party to the loan relationship. The transferee company then has to bring into account the same amount brought into account by the transferor company.

Where the transfer takes place before 9 April 2003, and the transferee company uses an authorised accruals basis, there may be a gap between the transferor’s ‘mark to market’ value and the transferee’s ‘accruals basis’ value. FA96/S90, which dealt with changes of accounting method, applied to ensure that the company receiving the asset (or liability) makes the appropriate adjustment when changing from mark to market to accruals for this particular loan relationship.