Taxation of loan relationships—impairment and debt releases: connected companies
Taxation of loan relationships—impairment and debt releases: connected companies

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Taxation of loan relationships—impairment and debt releases: connected companies
  • Connected companies relationships
  • What is a connected companies relationship?
  • Connection means control
  • Connection at any time in an accounting period
  • Back-to-back loans
  • Requirement to use amortised cost basis of accounting for tax purposes
  • Basic rule
  • Consequences
  • Application to a fair value hedge
  • More...

A foundational principle of the loan relationships regime is that the profits and losses to be brought into account for corporation tax purposes on a company’s loan relationships are calculated by reference to the treatment of those relationships in the company's financial statements. For this reason, it is often said that the tax treatment of loan relationships ‘follows the accounts’. For the general rules governing how profits and losses on loan relationships are calculated and brought into account for corporation tax purposes, see Practice Note: Taxation of loan relationships—the main rules.

In certain situations, however, the loan relationships rules require the tax treatment of a company's loan relationships to depart from the accounting measure of profit and loss. One such situation is where a debt falling to be taxed within the loan relationships rules:

  1. becomes impaired, or

  2. is released (in whole or in part)

The rules requiring a departure from the accounts where a debt is impaired or released are only relevant where a company accounts for a loan relationship using the amortised cost basis of accounting, or where a company is required to apply the amortised cost basis of accounting for the purposes of its corporation tax calculation pursuant to rules applying to loan relationships between connected companies (see below).

Different outcomes may arise depending on whether the parties to a particular loan relationship are connected

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