Introduction Background Note
17.The rules that apply to loan relationships work on the principle that amounts taxed and relieved as credits and debits under those rules are the profits and losses arising in accounts drawn up in accordance with generally accepted accounting practice. When a debt is impaired or written off by a creditor company its expense will normally be allowable as a loan relationships debit. When a debtor company is released from a debt it owes, its profit will be taxable as a loan relationships credit.
18.Where a debt exists between connected companies, such credits and debits are not normally brought into account for tax purposes. Exceptions to this approach prevent its exploitation when companies become connected. In particular, when debt that has been impaired by an unconnected company is then acquired by a company connected to the debtor, the tax rules impose a deemed release on the debtor. There is, in turn, an exemption from this deemed release to cater for “corporate rescues” where the debtor is in financial distress and a third party acquires the company and the debt it owes to unconnected companies.
19.This exemption has been used by companies to buy back publicly-issued debt that has been trading at a discount in the financial markets, in order to avoid the tax charge that would normally arise when debt is redeemed for less than the amount originally paid for it. The changes to these rules restricts the exemptions available to cases where there is a genuine corporate rescue, and to certain cases where a group engages in a self-rescue by way of issuing new debt or shares in exchange for old debt.