B2.206 Release of debts
In most cases in which a debt is incurred, the debt will be repaid. This is a transaction that has no tax consequences, nor any impact on the profit and loss account.
However, if the debt is formally released in full or in part (otherwise than as part of a statutory insolvency arrangement1), this means that relief would be obtained for an expense that is not actually incurred.
In such cases, the amount released is to be brought into account in calculating the profits of the trade. The amount is treated as arising on the date of the release for income tax purposes2. For corporation tax purposes it is treated as arising in the accounting period in which the release is effected3.
The release of the debt must involve a contractual agreement. Where the release is under seal no consideration is required. All other releases must involve the debtor giving consideration for the release, which can be in non-monetary form. A formal waiver of remuneration is a release of a debt. Intra-group debts may be released as part of a sale agreement involving the change of control of a company, and it is a question of fact