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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: where impaired debt is acquired: example

CTA09/S361: example

E Ltd and F Ltd are associated companies - both are under the control of the same individual. E Ltd owes £200,000 to a bank. Because the company is in financial trouble, and the bank sees little prospect of being able to recover the full amount of the debt, the bank agrees to sell the debt to F Ltd (which is profitable) for £120,000. It is agreed that £4,000 of this relates to interest that has accrued on the debt.

The new creditor, F Ltd, is connected with the debtor, E Ltd, and has been for some time - so the exemption at CTA09/S361(2) does not apply.

E Ltd accounts for the liability on an amortised cost basis, and its accounts show a liability of £200,000. Accrued interest is ignored, both in determining the carrying value of the debt in the accounts of E Ltd, and in determining the consideration that F Ltd gives for the loan relationship.

Thus F Ltd has paid £116,000 for a debt carried at £200,000 by the debtor. It is therefore deemed to have released £84,000 of the debt, so E Ltd must bring in a credit of £84,000 for the accounting period in which the transaction occurs.

Note that the operation of CTA09/S361(2) does not depend on the bank having recognised an impairment loss on the debt - although it is highly likely to have done so, the company purchasing the debt will not necessarily have access to this information.

Note also that E Ltd’s liability to F Ltd is £200,000, and interest on this debtor loan relationship is deductible in the normal way. It is not restricted in proportion to the amount of the deemed release. In this case, if interest was charged at 5% (that is, £10,000 per year), this amount would continue to be deductible; it would not be restricted to £116,000 x 5% (£5,800). There would be corresponding taxable interest income in F Ltd of £10,000.

Suppose that the fortunes of E Ltd subsequently improve, and in a later accounting period it repays the £200,000 to F Ltd in full.

E Ltd is deemed to have been released from £84,000 of the debt. So it is paying £200,000 to dispose of a liability of £116,000. It can bring in a debit for the loss of £84,000. This is not affected by CTA09/S352, because CTA09/S352 applies only to the creditor loan relationship.

F Ltd, having acquired the debt for £116,000, realises a profit of £84,000, which it is required to bring into account.

Deemed releases on or after 14 October 2009

See CFM35510 where an exemption from a deemed release under CTA09/S361 arises in respect of impaired debt acquired on or after 14 October 2009.