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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: the debt-for-debt exception

Debt buybacks on or after 14 October 2009: CTA09/S361B

No deemed release arises under CTA09/S358 on the acquisition of impaired debt by a connected creditor where the debt-for-debt exception applies. But if the creditor subsequently releases the debtor from the debt, a tax charge arises on a ‘release of relevant rights’ (CFM35520).

The exception requires the following conditions to be met.

  • The connected creditor company acquires impaired debt in an arm’s length transaction and it
  • issues a new security of its own in exchange for a security (the ‘old security’) issued by the debtor company (‘security’ includes ‘securities’), or
  • issues a new unsecured loan in exchange for a debtor company’s old unsecured loan.

The nominal value of the new security must be the same as that of the old security, and must have substantially the same market value. Whether the value is ‘substantially’ the same is ultimately a question of fact. The key point is that minor differences in interest, repayment and other terms between the old and the new security (or unsecured loan) will not prevent application of the exception.

The debt-for-debt exception applies where the consideration given for the acquisition of the old security or the old unsecured loan ‘consists only’ of the new security or unsecured loan. HMRC accepts that this will include the cases where

  • the issuer of the new security/loan agrees to pay any accrued but unpaid interest on the old security/loan when it acquires it in exchange for the new security/loan;
  • a proportion of the old debt is released in exchange for new debt and a proportion in consideration of the issue of shares.

Where there is mixed consideration for the old security/loan, a subsequent release is only taxable to the extent of the consideration met by new debt. This will require an apportionment of the consideration. Ultimately this is a question of fact.

The exception does not permit an exchange of a security for an unsecured loan, or vice versa.