Impairment losses and debt releases
Impairment losses and debt releases

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

  • Impairment losses and debt releases
  • What happens when a debt is impaired or released?
  • Summary of tax treatment
  • Debtors—overview
  • Debtors—statutory insolvency arrangements
  • Debtors—debt-for-equity swaps
  • Debtors—insolvency conditions
  • Debtors—mandatory reductions and stabilisation powers
  • Debtors—corporate rescue exemption
  • Creditors

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 loan 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.

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 in such cases are only relevant where a company accounts for a loan relationship using the amortised cost basis of accounting, or is required to apply the amortised cost basis of accounting for the purposes of its corporation tax calculation (eg pursuant to the rules applying to connected company debt). Different outcomes may then arise depending on whether the parties to a particular loan relationship are connected companies or not.

This Practice Note