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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: deemed releases on or after 27 February 2012: examples

Example 1

C Ltd has previously issued loan notes into the market, which are now trading at their fair market value of 80% of par. CA Ltd, a company in the same group, offers to acquire these notes in exchange for the issue of new notes. The new notes have a lower interest rate, but are otherwise offered on a par for par basis. They have a slightly higher fair value, to incentivise their take up, but are expected to trade at around 80% of par and hence have substantially the same market value. The company also offers a cash alternative to the new notes, on slightly less generous terms to encourage take up of the new notes.

CTA09/S361B provides a ‘debt-for-debt’ exception from the deemed release rule in CTA09/S361 where new debt of the same nominal value (and substantially the same market value) of the old debt is issued. CFM35550 makes it clear that the conditions in section 361B may be satisfied where there are differences in the interest rate, seniority or duration of the old and new debt. Structuring an exchange in the manner described above, in the absence of any avoidance purpose on the part of one of the parties to the arrangements, would not prevent CTA09/S361B applying, nor would they constitute arrangements to which CTA09/S363A applies. CTA09/S361B will not apply to the cash alternative.

Example 2

C Ltd has previously issued loan notes into the market, which are now trading at their fair market value of 80% of par. CA Ltd, a company in the same group, offers to acquire these notes in exchange for shares of P Plc, the parent company of C Ltd and CA Ltd. £80 of shares are offered for each £100 of notes exchanged, using a standard market formula to determine the share price. The shares are issued directly by P Plc, with an arm’s length fee paid by CA Ltd to P Plc to secure the issue of the shares.

CTA09/S361C provides an ‘equity-for-debt’ exception from the deemed release rule in CTA09/S361 in such cases (CFM35560). These are normal arrangements under which a debt-equity swap is made and do not constitute arrangements for the purposes of CTA09/S363A.