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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt

What is impaired debt?

The general rule that a debtor does not bring in credits when it is released from a liability by a connected company is over-ridden in two cases where

  • A connected creditor acquires ‘impaired debt’ to which the debtor is party, or
  • Unconnected creditor and debtor companies that are party to impaired debt become connected.

Impaired debt is debt of any kind that is unlikely to be paid in full. A purchaser will therefore pay less than full value for it, perhaps hoping to make a profit if the debtor recovers and can repay the debt.

A company might also buy impaired debt

  • because it has bought the debtor company, and wants to replace others as the creditor for any debts owed by the debtor company, or
  • as part of a restructuring of group finance, and wishes to buy in debt that a group company owes to a third party lender.

Scenario 1: purchasing debt with company purchase

DS Ltd is a struggling company that owes £100,000 to its parent company LM Ltd. KJ Ltd is an unconnected company formed by two former managers of DS Ltd, who think they can turn round DS Ltd’s business. KJ Ltd comes to an arrangement with LM Ltd to buy from it

  • the shares in DS Ltd and
  • its loans to DS Ltd.

DS Ltd will then be completely independent of its former parent. KJ Ltd pays £40,000 for the loans which is their market value.

Scenario 2: purchasing group debt during refinancing

MJ Ltd owes £100,000 to the bank, but can’t repay the loan. MJ Ltd’s parent company, JU plc, arranges to buy the debt from the bank for its market value, £40,000, which is less than the full amount due. By bringing the debt into the group, the group is no longer at the mercy of the bank and can organise its affairs better.

Tax treatment

The tax treatment of acquired impaired debt will depend on when the acquisition took place.

  • If a company acquires impaired debt in a period of account beginning before 1 January 2005, see CFM81100.
  • If the impaired debt is acquired on or after 16 March 2005, see CFM35440.
  • If the acquisition is in a period beginning on or after 1 January 2005, but it occurs before 16 March 2005, there is no requirement for the creditor to write the debt up to its face value, and no tax charge on the debtor. There will be no relief for any impairment losses recognised by the new creditor company.
  • If the debt is acquired and released after the Written Ministerial Statement (WMS) of 14 October 2009 on debt buybacks (in some cases where the release takes place after the WMS of 9 November 2009), see CFM35510 for changes to the rules governing the exemptions from a deemed release under CTA09/S361.