CTM06270 - Corporation Tax: company reconstructions: relevant liabilities restriction: details

ICTA88/S344 (5) - (12)

These paragraphs give details of the components of the relevant liabilities restriction imposed by ICTA88/S343 (4) and outlined at CTM06250. There are examples showing the operation of the relevant liabilities restriction at CTM06280.

Relevant liabilities

ICTA88/S344 (6) has a definition of the liabilities you count for the restriction. They are:

• liabilities which were outstanding and vested in the predecessor immediately before it ceased to carry on the trade,

• those liabilities which were transferred to the successor, and
• liabilities representing share capital, a share premium account, reserves or 'relevant loan stock'.

The value of the relevant liabilities is the amount of the liabilities immediately before the predecessor ceased to carry on the trade. In practice contingent liabilities should be included only to the extent they are included in the calculation of the tax losses.

Relevant loan stock

Relevant loan stock is defined in Section 344 (11) & (12). It is:

• any loan stock or similar security (whether secured or unsecured),

but excluding debts, which

• at the time they were incurred arose from advances made by a person carrying on the trade of lending money.

Because of the closeness of the wording of ICTA88/S344 (11) and TCGA92/S132 (3)(b), the meaning of 'debt on security' for the purpose of ICTA88/S343 follows that of the CGT legislation. The CGT meaning of 'debt on security' is defined at CG53420 onwards.

Relevant assets

Section 344 (5)(a) defines 'relevant assets'. These are:

• assets, which were vested in the predecessor immediately before it, ceased to carry on the trade, which were not transferred to the successor.

These are deducted in the relevant liabilities computation at market value. The definition of 'market value' is in Section 344 (7). It is in the same general terms as for CGT purposes. CG16330 onwards has guidance on principles of valuation.

Section 344 (10) deals with 'relevant loan stock':

• secured on an asset,
• which is not transferred to the successor.

The effect of Section 344 (10) is that you include the market value of the asset less the amount of the liability represented by the relevant loan stock.

Consideration

Section 344 (5)(b) defines 'consideration'. This is the amount given to the predecessor by the successor for the change in ownership of the trade or part-trade. Consideration does not however include the mere assumption by the successor of any liabilities of the predecessor.

Part-settlement of debts

Section 344 (8) concerns the situation where:

• a liability is transferred to the successor,

• the creditor concerned has agreed to accept less than the full amount due in settlement of the whole debt.

Section 344 (8) treats the shortfall as a liability for the purposes of the restriction.