SolvedCFM33270 | Loan relationships: the matters and computational rules: amounts not brought into account: buying imported losses
From HM Revenue & Customs · Corporate Finance Manual
Loss buying
CTA09/327(4) ensures that in an imported loss scenario, the loss is disallowed even if the loan relationship is transferred to another company.
Example
Pirt SA, a non-UK resident company, buys loan stock in an unconnected company on 1 June (Year 1) for £100,000, receiving fixed interest at 5%. By the end of Year 2, the loan stock is worth only £90,000 because of changes in interest rates and the issuing company’s future prospects. It is assumed that, in applying an amortised cost basis of accounting, the loan stock would not be impaired and would still be carried in its accounts at £100,000.
At the beginning of Year 3, Pirt SA migrates to the UK and sells the loan relationship to a fellow UK group member, Jik Ltd, for £100,000. At the end of Year 4, Jik Ltd sells the stock to an unconnected person for £84,000.
Pirt SA
Year 1
Interest accrued - £5,000
Year 2
Interest accrued £5,000
Loss on sale to Jik Ltd - minus £10,000
The companies are members of the same group, therefore CTA09/SS344-348 will apply to prevent any loss or profit on transfer (see CFM34000+ for more on intra-group transfers).
Jik Ltd
Year 3
Interest accrued - £5,000
Year 4
Interest accrued - £5,000
Loss on sale (taking account of the intra-group transfer) - minus £16,000
S327 adjustment £10,000
£10,000 (£100,000 less £90,000) of the loss refers to the pre-migration period.