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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Loan relationships: connected companies and impairment: debt-equity swaps: examples

Debt-equity swap: examples

Example 1: swap gives control

UJ Ltd has a 31 December accounting year. It makes a loan to unconnected company BG Ltd of £10,000 on 1 January 2006, repayable in 5 years. BG Ltd gets into difficulties and at 31 November 2008, UJ Ltd releases £7,000 of the loan, with the balance (£3,000) swapped in return for a controlling shareholding in BG Ltd.

Year Accounts Tax
     
31/12/2008 Dr £7,000 Debit £7,000 (connected, but relief allowed through CTA09/S356)

Example 2: initial swap does not amount to control

UJ Ltd has a 31 December accounting year. It makes a loan to unconnected company BG Ltd of £10,000 on 1 January 2006, repayable in 5 years. BG Ltd gets into difficulties and at 31 November 2008, UJ Ltd releases £3,000 of the debt, with £2,000 treated as repaid in return for a minority (25%) shareholding in BG Ltd. This proves insufficient. So on 1 March 2009 it releases a further £2,000 of the loan, with £3,000 treated as repaid in return for a further 40% shareholding in BG Ltd.

Year Accounts Tax
     
31/12/2008 Dr £3,000 Debit £3,000 (unconnected, so impairment allowed CFM33220)
31/12/2009 Dr £2,000 Debit £2,000 (connected, but relief allowed through CTA09/S356)

Example 3: further swap after control

UJ Ltd has a 31 December accounting year. It makes a loan to unconnected company BG Ltd of £10,000 on 1 January 2006, repayable in 5 years. BG Ltd gets into difficulties and at 31 December 2008, it releases £3,000 of the debt, with £4,000 treated as repaid in return for a majority (55%) shareholding in BG Ltd. This proves insufficient, so on 1 March 2009 it releases a further £1,000, with the balance of the loan, £2,000, treated as repaid in return for a further 25% of the shares.

Year Accounts Tax
     
31/12/2008 Dr £3,000 Debit £3,000 (connected, but relief allowed through CTA09/S356)
31/12/2009 Dr £1,000 Debit nil (connected, no relief through CTA09/S356 because connection occurred in previous period).