CTM06280 - Corporation Tax: company reconstructions: relevant liabilities restriction: examples
The following examples below show the operation of the relevant liabilities restriction imposed by ICTA88/S343 (4) and outlined at CTM06250.
Example 1: transfer of a whole trade
Company A is in financial trouble after sustaining heavy losses
and agrees to sell its business to Company C.
Company C is unwilling to take over the bank loan and the
creditors. So it is arranged that Company A sets up a wholly owned
subsidiary, Company B, and transfers to it its leasehold premises,
plant, goodwill, stock and employees for £450,000, which is
left on loan account. Company A retains its cash on hand and at
bank and the debtors. The unused ICTA88/S393 (1) losses at that
date are £1,200,000.
Two weeks after Company B began to carry on the trade,
Company C buys its shares for £1 and enables Company B to
repay the loan of £450,000.
Company A's balance sheet on the day it ceased to carry on
the trade stood as below.
| Assets | Liabilities | |||
| Tangible assets | £100,000 | Creditors | £1,500,000 | |
| Stocks | £250,000 | Bank loan | £500,000 | |
| Debtors | £500,000 | Share capital | £10,000 | |
| Cash | £5,000 | Profit & loss a/c | £(1,155,000) | |
| Total | £855,000 | Total | £855,000 |
Relevant liabilities restriction
| Liabilities retained | ||
| Creditors | £1,500,000 | |
| Bank loan | £500,000 | £2,000,000 |
| Less Assets retained | ||
| Debtors | £500,000 | |
| Cash | £5,000 | £505,000 |
| £1,495,000 | ||
| Less consideration | £450,000 | |
| 1,045,000 |
Company C is only entitled to losses of £155,000, that is, £1,200,000 minus £1,045,000.
Example 2 transfer of a part trade
The facts are as in Example 1 but Company A only wishes to sell
part of its trade to Company C.
Company C is unwilling to take over the bank loan and the
creditors. It is arranged that Company A sets up a wholly owned
subsidiary, Company B, and transfers to it the plant, stock and
employees relating to the part trade transferred, and the leases
for the premises the part-trade occupies. Company A does not
transfer any of the debtors, cash balances or liabilities. The sale
price is £3000,000. The unused ICTA88/S393 (1) losses at the
date of transfer are £800,000.
Two weeks after Company B began to carry on the trade,
Company C buys its shares for £1.
It is agreed that the following assets and liabilities should
be apportioned to the transferred part trade:
| Creditors | £900,000 |
| Bank loan | £350,000 |
| Cash | £2,000 |
| Debtors | £200,000 |
Relevant liabilities restriction
| Liabilities retained | ||
| Creditors | £900,000 | |
| Bank loan | £350,000 | £1,250,000 |
| Less assets retained | ||
| Debtors | £200,000 | |
| Cash | £2,000 | £202,000 |
| £1,048, 000 | ||
| Less consideration | £300,000 | |
| £748,000 |
Company C only entitled to losses of £52,000, that is,
£800,000 minus £748,000.
The remaining losses of £748,000 do not revert to
Company A but are cancelled.
