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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: deemed releases on or after 14 October 2009: ‘release of relevant rights’

Debt buybacks on or after 14 October 2009: deemed releases include releases of ‘relevant rights’

CFM35440 explains that the normal rule in CTA09/S358 that no credit is brought in by a debtor company in respect of a release by a connected creditor is disapplied where there is a ‘deemed release’.

With effect for transactions taking place on or after 14 October 2009, CTA09/S358 is amended so that a debtor company will also be subject to a credit in respect of a ‘release of relevant rights’ (CTA09/S358(4)).

A release of relevant rights is the amount that would have been taxed as a ‘deemed release’ but for the application of either the ‘corporate rescue’ exception, or the ‘debt-for-debt’ exception (CFM35540 and CFM35550). In effect the release of relevant rights is the crystallisation of the deemed release that was deferred by the application of the exceptions.

The amount of the release of relevant rights is the discount at which the debt was acquired by the connected creditor (or by another company to which the debt has been assigned), less any amounts taxed on the creditor (and any other company to which the debt was assigned) in respect of the discount either in previous accounting periods or in the period in which the release takes place.

The new creditor’s carrying value of the debt is the amount of the consideration it pays for the acquisition. If it does not release the debt, accounts drawn up under the amortised cost basis will normally show the accretion of amounts equal to the discount at which it purchased the debt. If, exceptionally, no accreting amounts are brought in as taxable credits, and the debtor actually repays the new creditor more than it paid for the acquisition of the debt, the creditor will be taxable on the profit, and the debtor will have a corresponding debit.