CTM06280 | Corporation Tax: company reconstructions: relevant liabilities restriction - examples
From HM Revenue & Customs · Company Taxation Manual
The following examples below illustrate the operation of the relevant liabilities restriction imposed by and outlined at .
Example 1: transfer of a whole trade
Company A is in financial trouble after sustaining heavy losses and agrees to sell its business to company C.
Company C is unwilling to take over the bank loan and the creditors. So it is arranged that Company A sets up a wholly owned subsidiary, Company B, and transfers to it its leasehold premises, plant, goodwill, stock and employees for £450,000, which is left on loan account. Company A retains its cash on hand and at bank and the debtors. The unused carry forward losses at that date are £1,200,000.
Two weeks after company B began to carry on the trade company C buys its shares for £1 and enables company B to repay the loan of £450,000.
Company A's balance sheet on the day it ceased to carry on the trade stood as below.
| Assets | £ | Liabilities | £ |
|---|---|---|---|
| Tangible assets | £100,000 | Creditors | £ 1,500,000 |
| Stocks | £250,000 | Bank loan | £ 500,000 |
| Debtors | £500,000 | Share capital | £ 10,000 |
| Cash | £ 5,000 | Profit & loss a/c | £(1,155,000) |
| Total | £855,000 | Total | £ 855,000 |
Relevant liabilities restriction
| Liabilities/ Assets retained | £ | £ |
|---|---|---|
| Creditors | £1,500,000 | |
| Bank loan | £ 500,000 | £2,000,000 |
| Less Assets retained | ||
| Debtors | £ 500,000 | |
| Cash | £ 5,000 | £ 505,000 |
| £1,495,000 | ||
| Less consideration | £ 450,000 | |
| £1,045,000 |
Company B is only entitled to losses of £155,000, that is, £1,200,000 minus £1,045,000.
Example 2: transfer of a part trade
The facts are as in Example 1 but company A only wishes to sell part of its trade to company C.
Company C is unwilling to take over the bank loan and the creditors. It is arranged that company A sets up a wholly owned subsidiary, company B, and transfers to it the plant, stock and employees relating to the part trade transferred, and the leases for the premises the part-trade occupies. Company A does not transfer any of the debtors, cash balances or liabilities. The sale price is £300,000. The unused carry forward losses of the part trade transferred at the date of transfer are £800,000.
Two weeks after company B began to carry on the trade, company C buys its shares for £1.
It is agreed that the following assets and liabilities should be apportioned to the transferred part trade:
| Assets and Liabilities | £ |
|---|---|
| Creditors | £900,000 |
| Bank loan | £350,000 |
| Cash | £ 2,000 |
| Debtors | £200,000 |
Relevant liabilities restriction
| Liabilities/Assets retained | £ | £ |
|---|---|---|
| Creditors | £900,000 | |
| Bank loan | £350,000 | £1,250,000 |
| Less assets retained | ||
| Debtors | £200,000 | |
| Cash | £ 2,000 | £ 202,000 |
| £1,048, 000 | ||
| Less consideration | £ 300,000 | |
| £ 748,000 |
Company B is only entitled to losses of £52,000, that is, £800,000 minus £748,000.
The remaining losses of £748,000 do not revert to company A but are cancelled.