CFM5517 - Taxing loan relationships: connection and impairment: Para 4A

Connected persons and acquired impaired debt - transactions on or after 16 March 2005

This guidance applies in periods of account beginning on or after 1 January 2005.

FA96/SCH9/PARA4A was introduced by FA 2005, but the original legislation was superseded by a revised version in FA (No2) 2005. It applies in two circumstances:

• where, on or after 16 March 2005, a company acquires an impaired creditor loan relationship and is either already connected with the debtor company or becomes connected at the same time; this is subject to an exception
• where a company already holds impaired debt and, on or after 16 March 2005, becomes connected with the debtor company.

In both cases, there is deemed to be a release of the “impaired” portion of the debt. This gives rise to a taxable credit in the debtor company. The normal rule in Para 5(5) that no credit is brought into account by the debtor when connected party debt is released is disapplied.

CFM5518 covers the first circumstance, and CFM5519 the second.

Para 4A does not apply to trade and similar debts, even if from the creditor’s perspective FA96/S100 applies the loan relationships rules on impairment losses to them. A money debt owed by a company may be treated as a loan relationship if exchange gains and losses or interest arise on it, and may therefore meet the initial test for the application of Para 4A. However, even if Para 4A does operate to deem the release of such a debt, there are no loan relationships consequences for the debtor company because such a release is not one of the matters within FA96/S100 (1)(c).

“Connection” in Para 4A has the same meaning that it has in FA96/S87. If two companies are not regarded as connected because they both controlled by a governmental organisation ( CFM5405a), or because the creditor holds the debt in exempt circumstances ( CFM5420), they are not connected for the purposes of Para 4A.