Corporate debt and derivatives: losses allowed on de-grouping

Pat Dugdale

The Government is in the process of a major re-think of fundamental aspects of the tax treatment of corporate debt and derivatives and a Technical Note is expected to be published shortly setting out proposed changes. Most of the significant changes have been postponed to 2015, but one welcome measure announced today is the extension of the de-grouping provisions to allow losses to be brought into account as well as profits.

Under current law, where a loan or derivative is transferred between UK resident group companies, it is broadly on a tax neutral basis, no credits or debits are brought into account and the transferee inherits the transferor’s notional carrying value. If the transferee then leaves the group, there is a deemed disposal and  re-acquisition at fair market value and the transferee may be taxed on any credit. However, if the value has fallen and the deemed disposal is at a loss, there is generally no relief for the debit, unlike in the case of the capital gains tax de-grouping rules which can trigger allowable losses as well as gains.  With effect from 1st April 2014, the loan relationships and derivatives legislation will be amended so that both credits and debits will be brought into account on de-grouping.

It has also been announced that legislation “rationalising” the treatment of loans and derivatives held by partnerships is to be postponed to 2015. This had been intended for Finance Bill 2014 but appears to have been moved into the ever-expanding “too complicated” pile, along with reform of the existing unallowable purpose rule and a proposed new regime-specific anti-avoidance rule to sit alongside the GAAR.

We will await the publication of the Technical Note with interest and post our thoughts on it.


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