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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: connected companies and impairment: basic rules: related transactions: examples

Related transactions and connected companies: examples

Adjusting loss on disposal: example 1

UJ Ltd makes a loan of £10,000 to its subsidiary, BG Ltd, repayable in 5 years. In year 1, UJ Ltd writes £2,000 off the loan as bad. In Year 2 it sells the loan to an unconnected company, Yoff Brokers Ltd, for £7,000.

Actual debits

In Year 1 the impairment of £2,000 is disallowed under CTA09/PT5/CH6. Debit nil.

In Year 2 the loss of £1,000 is a potential debit under CTA09/S293.

Assumed debits (as if no disposal)

In Year 1 the impairment of £2,000 is disallowed under CTA09/PT5/CH6. Debit nil.

In Year 2 we assume no disposal, so debit nil.

The assumed debit is smaller than the actual debit, so the amount to be brought into the accounts is nil.

Example 2

UJ Ltd makes a loan of £10,000 to its subsidiary, BG Ltd, repayable in 5 years. In Year 1, UJ Ltd writes £2,000 off the loan as bad. In Year 2 it releases BG Ltd from its obligation to pay.

Actual debits 

In Year 1 the bad debt of £2,000 is disallowed under CTA09/PT5/CH6. Debit nil

In Year 2 the loss of £8,000 is a potential debit under CTA09/S293, the release being a related transaction. But UJ Ltd is connected to BG Ltd and has ceased to be a party to the loan relationship.

Assumed debits  

In Year 1 the bad debt of £2,000 is disallowed under CTA09/PT5/CH6. Debit nil.

In Year 2 we assume no disposal, so debit nil.

The assumed debit is smaller than the actual debit, so the amount to be brought into the accounts is nil.