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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 equity-for-debt exception

Debt buybacks on or after 14 October 2009: CTA09/S361C

No deemed release arises under CTA09/S358 on the acquisition of impaired debt by a connected creditor where the equity-for-debt exception applies.

Unlike the case with the corporate rescue exception, or the debt-for-debt exception, if the creditor subsequently releases the debtor from the debt, there is no tax charge on a ‘release of relevant rights’ (CFM35520). The group is thus in the same position as if the debtor company itself had issued ordinary shares in consideration of the release of its debt by its original third party creditors. In such a case no credit would have arisen under CTA09/S322(4) (CFM33200).

The exception requires the following conditions to be met:

  • the connected creditor company acquires impaired debt in an arm’s length transaction and
  • the consideration for the debt is an issue of its own ordinary shares or the ordinary shares of another connected company (or an entitlement to those shares).