CFM81260 - Old rules: loan relationships: connection and bad debts - special cases: effect on debtor where creditor insolvent

Creditor in liquidation: effect on debtor

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

Where a creditor company

  • lent money to, or otherwise was party to a loan relationship with, a connected company,
  • entered insolvency proceedings, and then
  • released the debt,

the debtor company’s position under the old rules depended on whether or not the insolvency proceedings severed the connection.

Where connection continued, the tax treatment followed the normal rules of loan relationships and any release was not be taxable on the debtor company - FA96/SCH9/PARA5(5) (previously FA96/SCH9/PARA5(3)).

Note that if the creditor obtained bad debt relief for unpaid interest where connection continued, that did not mean that the debtor was denied relief for the corresponding debits under the connected parties rule at FA96/SCH9/PARA2. The creditor had still brought the credits ‘into account’, for the purposes of that rule.

Where the creditor and debtor companies ceased to be connected as a result of the insolvency proceedings, the debtor company was not required to bring in any credit in respect of a release made on or after 10 December 2003 (FA96/SCH9/PARA5(6)).

Note that the definition of ‘control’ in FA96/S87A changed for accounting periods beginning on or after 1 October 2002. It was therefore possible that a debtor company may strictly have been required to bring in a credit under FA96/SCH9/PARA5(3) when insolvency proceedings had severed the connection with the creditor company. This situation was likely to arise where the creditor company subsequently released the debtor company from its debt in an accounting period beginning on or after 1 October 2002, but before 10 December 2003 when the changed rules applied. As long as the other conditions in FA96/SCH9/PARA5(6) were satisfied and it was just the timing of the release that required the debtor company to bring in a credit, a sympathetic approach was recommended.

The current rules can be read at CFM35410.