CFM35440 - Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: tax treatment
You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.
Tax treatment of acquired impaired debt
CTA09/S361 deals with the acquisition of creditor rights by a connected company at undervalue, and CTA09/S362 deals with parties becoming connected where the creditor’s rights are subject to an impairment adjustment - that is, they deal with the acquisition of impaired debt, and with impaired debt between companies that become connected.
The rules apply in two circumstances:
where a company acquires impaired debt and is already connected with the debtor company or becomes connected at the same time (CFM35450)
where a company already holds impaired debt and becomes connected with the debtor company (CFM35480)
There are, however, exclusions that can apply in certain circumstances. See CFM35530 for further details.
In both cases, there is deemed to be a release of the ‘impaired’ portion of the debt. This gives rise to a taxable credit in the debtor company. The normal rule in CTA09/S358 that no credit is brought into account by the debtor when connected party debt is released is disapplied. This is referred to as a ‘deemed release’.
‘Connection’ here is defined by CTA09/S363. If two companies are not regarded as connected because they both controlled by a governmental organisation (CFM35110), or because the creditor holds the debt in exempt circumstances (CFM35130), they are not connected for these purposes.
The rules will not apply if the creditor company buys the debt from another company, and the ‘old creditor’ and ‘new creditor’ are connected - either one controls the other, or they are under common control - so there will be no tax charge on the debtor company when a debt is transferred within a group.