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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: further example

CTA09/S361: further example

H Ltd is owned 55% by H (Holdings) plc and 45% by G Ltd, a company unconnected with H (Holdings) plc. On 30 June 2006, G Ltd buys from H (Holdings) plc

  • the remaining 55% of the shares in H Ltd, and
  • a discounted loan note of face value £5 million issued by H Ltd to H (Holdings) plc. The note was issued for (say) £2m in 2000 and matures in 2010.

All three companies draw up accounts to 31 December.

Does CTA09/S361 exemption apply?

G Ltd had, in 2001, lent £10 million to H Ltd. Up to 31 December 2002, G Ltd was connected with H Ltd. This was because, for accounting periods beginning before 1 October 2002, the ICTA88/S416 definition of control applied (see CTM53820), and G Ltd would have been entitled to the greater part of the assets of H Ltd in a winding-up through a combination of its shares and loan creditor rights.

Since the companies were connected at some time in the period beginning four years before the acquisition (and ending 12 months before that time), the exemption at CTA09/S361(2) cannot apply.

The effect of CTA09/S361

The debtor company, H Ltd, will in its accounts initially have recognised the discounted note at its issue price, writing up the liability to the full amount of £5 million over the period to maturity. At 30 June 2006, its carrying value in the books of the debtor company (on the assumption that H Ltd draws up a balance sheet immediately before the debt changes hands) is £3,750,000.

G Ltd pays only £3 million for the debt. CTA098/S361 will therefore apply: there is deemed to be a release of £750,000 of the debt, and H Ltd must accordingly bring in a credit of £750,000.

Apportionment of consideration

In most cases, the contract for purchase of the shares and the debt will provide an apportionment between the two elements. HMRC staff should accept the contractual apportionment unless it is patently unreasonable - see CG14773-4 in this context.

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.