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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’: example

Debt buybacks on or after 14 October 2009: example

The facts are as in scenario 1 in CFM35430.

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. KJ Ltd does not bring in any credits in respect of the acquired debt.

On the assumption that KJ Ltd’s acquisition of the shares and debt of DS Ltd takes place after the amendments to CTA09/S358 and S361, and meet the conditions for the corporate rescue exception in CTA09/S361A (CFM35540), there will be no ‘deemed release’ on DS Ltd of £60,000. However, if KJ Ltd then releases the entire debt from DS Ltd, there will be a ‘release of relevant rights’ of £60,000 under CTA09/S358(4) (CFM35520).