CFM35540 | Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: deemed releases : the 'old' corporate rescue exemption

CTA09/S361A (repealed)

S361A was repealed for acquisitions of impaired debt on or after 18 November 2015. However it is still relevant because if used in an earlier period it can result in a release of relevant rights.

The ‘old’ corporate rescue exception

No deemed release arises under S361 on the acquisition of impaired debt by a connected creditor where the original corporate rescue exemption applies. But if the creditor subsequently releases the debtor from the debt, a tax charge arises on a ‘release of relevant rights’ (CFM35520).

The exemption required the following conditions to be met.

• The connected creditor’s acquisition of the impaired debt must have been an arm’s length transaction.

• There must have been a ‘change in ownership’ within the meaning of ICTA88/S769 (CTM06340) in the period beginning one year before the acquisition of the debt and ending 60 days after.

• It must have been ‘reasonable to assume’ that but for the change in ownership, the company would have met one of the insolvency conditions within a period of 12 months from the date of ownership (CFM33190).

• It is reasonable to assume that but for the change in ownership, the acquisition of the debt would not have been made.

‘Reasonable to assume that the insolvency conditions will be met’

HMRC will accept that it is reasonable to assume that the company would have met the insolvency conditions where, for example:

• insolvency is avoided not only by the change of ownership itself but also by steps taken following the change of ownership;

• under guarantee arrangements that apply to the debtor company’s borrowing, enforcement action might actually be taken against another company in the group;

• there is evidence that the insolvency conditions would be met but the company has not publicly acknowledged its potential insolvency because of the need to engage in sensitive discussions with lenders and auditors over banking covenants and its going-concern status.

Evidence to support such a ‘reasonable assumption’ might include management accounts showing an insolvent balance sheet, or evidence of a breach of a debt covenant breach.