CFM35390 - 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). |