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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: connected companies and impairment: basic rules: example

No relief: example

BH Ltd lends GF Ltd £30,000 for 3 years, at 5% interest each year. BH Ltd owns 100% of the ordinary shares of GF Ltd, so the companies are connected under CTA09/S348.

In Year 1, BH Ltd receives the interest due of £1,500. At the end of Year 2, GF Ltd’s trading position has deteriorated and it is unable to pay the interest due for Year 2. There are also serious doubts that it will be able to repay the loan. BH Ltd therefore regards the interest due as bad for Year 2 and formally releases half of the loan.

Year BH Ltd accounts BH Ltd tax GF Ltd accounts GF Ltd tax
1 Cr £1,500 Cr £1,500 Dr £1,500 Dr £1,500
2 Dr £15,000 (loan released) Cr £1,500    
Dr nil Dr £1,500
Cr £15,000 Dr £1,500
Cr nil

CTA09/S354 prevents BH Ltd from bringing in any debit in respect of the impairment loss, but CTA09/S358 excludes any credits being brought in by the debtor company.