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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected companies and impairment: exceptions: debt-equity swaps: CG aspects

Valuation of debt swapped for equity

Where the borrower is in financial difficulties and the debt is impaired, the value of the shares taken in the debt/equity swap may fall short of the loan treated as discharged. In most cases, the creditor accepts the shares as satisfying the debt in full. Alternatively, the creditor may release part of the loan, with the shares received taken as consideration for repayment of the balance.

Because a debt/equity swap involves exchanging a loan relationship (a qualifying corporate bond) for shares, there are chargeable gains implications.

The debt/equity swap is likely to be treated as a reorganisation of share capital by TCGA92/S132. Since the ‘old asset’ - the debt - is a QCB, and the ‘new holding’ - the shares - is a non QCB, the debt that has been swapped for shares is treated for loan relationships purposes as having been disposed of for its market value (TCGA92/S116(8A)). Under TCGA92/S116(6), the capital gains base cost of the shares is that same market value. The market value of the shares is irrelevant.

There is guidance on this at CG54095 onwards.