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HMRC internal manual

Corporate Finance Manual

Derivative contracts: group continuity: avoidance using group continuity rules

Finance Act 2008 changes to group continuity rules

Some companies holding derivative contracts (or loan relationships) with a market value in excess of their historic cost and accounts carrying value sell the contracts (or loans) at full value to a partnership, the members of which are fellow group companies. This gives rise to an accounting profit to the transferor but, it is claimed, this profit will not be taxable because of the operation of the group continuity rule.

Subsequently, or as part of the arrangements, another company joins the partnership in return for making a capital contribution equal in value to the asset transferred to the partnership. The new partner then becomes entitled to virtually all of the profits of the partnership including any rights in respect of the derivative contract. It is claimed that no tax charge arises despite the fact that, in economic terms, the contract has been transferred to the new partner.

Finance Act 2008 inserted rules to address this form of avoidance with effect for transactions taking place, or a series of transactions of which the first takes place, on or after 16 May 2008.

CTA09/S625 will not apply to a transfer of a loan relationship to another company in the same group where:

  • the transferor company is party to arrangements giving rise to a likely transfer by the transferee company of rights or liabilities under the loan relationship to another person where section 625 would not apply, and
  • the purpose, or one of the main purposes, of the arrangements is to secure a tax advantage for the transferor company or a person connected with that company.


The following words or phrases appearing above are defined as follows for the purposes of this rule:

‘Arrangements’ includes any agreement, understanding, scheme, transaction or series of transactions.

‘Connected’ in this context takes its meaning from CTA10/S1122.

‘Tax advantage’ has the meaning given to it by CTA10/S1139.

‘Transfer’ includes any arrangements that amount in substance to a transfer. It also includes an acquisition or disposal or an increase or decrease in a share of the profits or assets of a partnership.