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HMRC internal manual

Corporate Finance Manual

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Loan relationships: tax avoidance: transactions not at arm's length: exceptions: less than market value examples

Acquiring a loan relationship at less than market value: examples

Example 1

Millet Ltd buys a security on the open market for £5m redeemable in 5 years. In Year 3, when the market value of the security is £5.5m, it sells it to Hildon Ltd for £4.5m. Millet Ltd and Hildon Ltd are companies owned by Mr and Mrs Brown, and so are associated but not grouped.

The transaction is not at arm’s length so CTA09/S444 applies.

Millet Ltd

Millet Ltd’s records will show a credit of £4.5m, giving rise to a loss on sale of £0.5m. Under S444(1), this credit is disregarded, and instead the arm’s length value is substituted and the ongoing debits and credits calculated accordingly. As a result there is a profit of £0.5m.

Hildon Ltd

Hildon Ltd, in its records, will recognise a debit of £4.5m and accrue the ‘market’ discount of £0.5m (the difference between the purchase price £4.5m and the redemption value of £5m) as credits. If S444(1) made Hildon Ltd substitute true market value, £5.5m, these credits would be ignored, and instead it would debit the ‘market’ premium of £0.5m over the remaining term, being the difference between market value £5.5m and the redemption amount £5m. However, S444(1) does not apply to debits where the security was acquired for less than market value. So the debit of £4.5m stands and the whole ‘market’ discount of £0.5m, following the accounts, is brought in.

Example 2

Millet Ltd buys a security on the open market for £5m, redeemable in 5 years. In Year 3, when the market value of the security is £4.5m, it sells it to Hildon Ltd for £4m. Millet Ltd and Hildon Ltd are companies owned by Mr and Mrs Brown, and so are associated but not grouped. The transaction is not at arm’s length so S444 applies.

Millet Ltd

Millet Ltd’s records will show a credit of £4m, giving rise to a loss on sale of £1m. Under S444, this credit is disregarded, and instead the arm’s length value is substituted and the ongoing debits and credits calculated accordingly. As a result there is a loss of £0.5m.

Hildon Ltd

Hildon Ltd, in its records, will show a debit of £4m and will accrue the ‘market’ discount of £1m (the difference between the purchase price £4m and the redemption value of £5m) as credits. S444 does not apply to debits arising from the acquisition of rights under a loan relationship where those rights are acquired for less than market value. As a consequence the acquisition price is not adjusted to the higher market value and the acquiring company continues to accrue the ‘market’ discount of £1m.