CFM35560 | Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: the equity-for-debt exemption

CTA09/S361C

The equity-for-debt exemption

No deemed release arises under CTA09/S361 on the acquisition of impaired debt by a connected creditor where the equity-for-debt exemption applies.

If the creditor subsequently releases the debtor from the debt, there is no tax charge on a ‘release of relevant rights’ (CFM35520). The group is thus in the same position as if the debtor company itself had issued ordinary shares in consideration of the release of its debt by its original third party creditors. In such a case no credit would have arisen under CTA09/S322(4) (CFM33200).

The exemption requires the following conditions to be met:

• the connected creditor company acquires impaired debt in an arm’s length transaction and

• the consideration for the debt is an issue of its own ordinary shares or the ordinary shares of another connected company (or an entitlement to those shares).