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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Old rules: loan relationships: connection and bad debts: acquiring bad debts: relief for acquired debt

Relief for acquired bad debt

This guidance applies to periods of account beginning before 1 January 2005

Under the old rules, the conditions for excluding purchase discount when bad debt was bought and the companies were connected were given in para 6B(6).

The new creditor company had

  • to have acquired its rights to the debt on arm’s length terms from the old creditor
  • not be connected to the old creditor
  • not have been connected to the debtor for the period

 

  • starting 4 years before, and
  • ending 12 months before it acquired the debt.

For para 6B(6), the definition of connection followed FA96/S87. There was a connection between a company and another person if

  • the other person was a company, and one of the companies controlled the other, or
  • both were companies under the control of the same person.

Example: previous connection

YT Ltd bought a controlling shareholding in JT Ltd. At the same time, it bought loan stock in JT Ltd from an unconnected bank on 1 January 2003. It paid £50,000 although the redemption amount was £75,000 - JT Ltd was struggling and was unlikely to repay in full.

Between 1 January 1996 and 31 December 2000, YT Ltd and JT Ltd were both 100% subsidiaries of RD plc. Para 6B(6) could not have applied because of the previous connection.

Para 6B(6) could have applied if the connection had ceased before 1 January 1999.