CFM35430 | Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt

What is impaired debt?

The general rule that a debtor does not bring in credits when it is released from a liability by a connected company is over-ridden in two cases where

• A connected creditor acquires ‘impaired debt’ to which the debtor is party, or

• Unconnected creditor and debtor companies that are party to impaired debt become connected.

Impaired debt is debt of any kind that is unlikely to be paid in full. A purchaser will therefore pay less than full value for it, perhaps hoping to make a profit if the debtor recovers and can repay the debt.

A company might also buy impaired debt

• because it has bought the debtor company, and wants to replace others as the creditor for any debts owed by the debtor company, or

• as part of a restructuring of group finance, and wishes to buy in debt that a group company owes to a third party lender.

Tax treatment

The tax treatment of acquired impaired debt will depend on when the acquisition took place.

For the current rules on acquired impaired debt, see CFM35440.

The rules have been amended several times since they were introduced. Most recently, F(No 2)A 2015 introduced changes to the rules to ensure that the tax treatment for debtor companies in a corporate rescue situation is broadly consistent whether the debtor and creditor are unconnected, connected or become connected. Please see CFM33192 for a full explanation of the policy intention behind the changes.

Release of relevant rights

A debtor company is also subject to a credit in respect of a ‘release of relevant rights’ (CTA09/S358(4)). See CFM35520 for further explanation of ‘release of relevant rights’ and the situations where this will apply.