CFM35480 | Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: where holders of impaired debt become connected

CTA09/S362

Creditor and debtor become connected

A deemed release will also occur when a previously unconnected creditor company (‘C’) that holds debt becomes connected with the debtor company (‘D’).

In this case, the creditor company is deemed to release its rights under the debt at the point the companies become connected.

The amount of the deemed release is the difference between the pre-connection carrying value (PCCV) in C and the PCCV in D.

The PCCV is defined differently in relation to C and D.

Debtor company (D)

For D the PCCV means the carrying value in D’s accounts if a period of account had ended immediately before the companies became connected. Profits and losses in the debtor’s accounts will, subject to specific rules, be taxable or relievable as loan relationships debits and credits in the normal way.

Creditor company (C)

For C the PCCV means:

• the carrying value of the debt in C’s accounts at the end of the period of account before the companies became connected under the assumption that an amortised cost basis of accounting is applied, or

• where C acquired the debt after that date, the consideration given for the acquisition.

See the examples at CFM35490

Fair value accounting

Where the creditor company has accounted for the loan relationship at fair value through profit and loss, an adjustment would be needed under CTA09/S316. This is because the company must start to use an amortised cost method for tax purposes from the beginning of the accounting period in which the connection starts.

The PCCV for the creditor company assumes the company applies an amortised cost basis of accounting in respect of the debt. As a result, the PCCV starts with the position as adjusted under CTA09/S316. No impairment, or reversal of impairment, between the beginning of the accounting period and the date of impairment, will therefore be relievable or taxable.

For accounting periods commencing before 1 January 2016, CTA09/S350 applies instead of CTA09/S316

CFM35490 gives examples of the interaction between S316 and S362. There is a further example of S362 at CFM35500.

Accrued and pre-paid amounts

When making the comparison between the carrying value in the debtor’s books and the amount paid by the creditor, accrued amounts and any amounts paid or received in advance are ignored.

S362: creditor and debtor become connected before 1 April 2012

Where previously unconnected creditor and debtor companies become connected before 1 April 2012, the charge under S362 is calculated differently. Cases where this applies should be referred to the Financial Products Team.