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CG46150 | Groups: indexation allowance restriction: debts on a security

From HM Revenue & Customs · Capital Gains Manual

The provisions which eliminate or restrict indexation allowance on the disposal of a debt on a security are in TCGA92/S182. Instructions on the meaning of `debt on a security' are at CG53420+. A company may dispose of a debt on a security by

  • assigning it to another person

  • receiving payment

  • making a negligible value claim.

The provisions do not apply to a simple debt (that is, a debt which is not a debt on a security). This is because on the disposal of a simple debt by

  • THE ORIGINAL CREDITOR neither a chargeable gain nor an allowable loss can accrue, see CG53471

  • A TRANSFEREE FROM THE ORIGINAL CREDITOR, no allowable loss can accrue where the transferor and the transferee, or all the transferors and transferees in a sequence of transfers, are connected persons, see CG53480+.

Indexation allowance is eliminated completely by TCGA92/S182 (1) on the disposal of a debt on a security if the creditor company and the debtor company were linked companies both

  • immediately after the creditor company acquired the debt (by making a loan or by acquiring an existing debt), and

  • immediately before the creditor company disposed of the debt.

These tests refer to the time immediately after the acquisition of the debt and the time immediately before the disposal of the debt since it is possible that the loan may itself make the companies linked. This may happen where the loan establishes control and as a result the companies become associated.

If the companies were not linked immediately after the debt was acquired by the creditor company but

  • subsequently became linked, and

  • were linked immediately before the disposal of the debt by the creditor company

then the indexation allowance is restricted. TCGA92/S182 (2) provides that in these circumstances indexation is only due up to the time the companies first became linked. This is achieved by substituting the RPI for the month in which the companies first became linked (or the RPI for March 1982 if later) for the RPI for the month of actual disposal (RD) in the indexation formula

cost x

RI

in TCGA92/S54 (1).

These provisions could be sidestepped by company A lending money in the form of a debt on a security to an unconnected third party, such as a bank, and the third party then making an equivalent loan to company B, which is linked with company A. To prevent this result the provisions which eliminate or restrict indexation allowance also apply if all the following conditions in TCGA92/S182 (5) are satisfied.

  • A company disposes of a debt on a security owed by any person.

  • The company and that person were not linked companies immediately before the disposal.

  • The debt was incurred by that person as part of arrangements involving another company being put in funds. The phrase `put in funds' covers the provision of finance in any form.

If these conditions are met, the provisions apply as they would have done if the debt were owed by the company which was put in funds. The result is to eliminate or restrict the indexation allowance available to the creditor company on the disposal of the debt owed by the intermediary.

Where the creditor company and the company which is put in funds are members of the same group, it may be apparent from the accounts that a debt on a security advanced by the one to a third party more or less corresponds to the provision of finance to the other by the third party. However the point will only be material when the debt on a security is disposed of and the computation shows an indexation allowance on the disposal.