CTM06270 | Corporation Tax: company reconstructions: relevant liabilities restriction - details
From HM Revenue & Customs · Company Taxation Manual
and S947
These sections give details of the components of the relevant liabilities restriction imposed by and outlined at . There are examples showing the operation of the relevant liabilities restriction at .
Relevant liabilities
and S946 define the liabilities counted for the restriction. They are:
liabilities which were outstanding and vested in the predecessor immediately before it ceased to carry on the trade,
but excluding
those liabilities which were transferred to the successor, and
equity-type 'liabilities' representing share capital, a share premium account, reserves or ‘relevant loan stock’.
The value of the relevant liabilities is the amount of the liabilities immediately before the predecessor ceased to carry on the trade. In practice contingent liabilities should be included only to the extent they are included in the calculation of the tax losses.
Relevant loan stock
Relevant loan stock is defined in and (9). It is:
any loan stock or similar security (whether secured or unsecured),
but excluding debts, which
at the time they were incurred arose from advances made by a person carrying on the trade of lending money.
Because of the resemblance of to , the meaning of ‘debt on security’ for the purpose of follows that of the capital gains legislation. The capital gains meaning of ‘debt on security’ is discussed at onwards.
Relevant assets
defines ‘relevant assets’. These are assets, which were vested in the predecessor immediately before it ceased to carry on the trade, which were not transferred to the successor.
These are deducted in the relevant liabilities computation at market value. The definition of ‘market value’ is at . It is in the same general terms as for capital gains purposes. See onwards for principles of valuation.
deals with ‘relevant loan stock’
secured on an asset, and
which is not transferred to the successor.
The effect of is that the market value of the asset is reduced by the amount of the liability represented by the relevant loan stock.
Consideration
defines ‘consideration’. This is the amount given to the predecessor by the successor for the change in ownership of the trade or part-trade. Consideration does not however include the mere assumption by the successor of any liabilities of the predecessor.
Part-settlement of debts
addresses the situation where
a liability is transferred to the successor, but
the creditor concerned has agreed to accept less than the full amount due in settlement of the whole debt.
treats the shortfall as a liability for the purposes of the restriction.