What is the debt-for-debt exception under section 361B of the Corporation Tax Act 2009?

Section 361B provides an exception from the connected companies debt release rules. When an existing loan between connected companies is replaced by a new loan for a lower amount, the debtor company is not taxed on the difference. The credit excluded from tax is capped at the amount of the new loan issued.

What conditions must be met for the section 361B debt-for-debt exception to apply?

Seven conditions must be satisfied: the debtor must be released from an old loan liability, a taxable credit must otherwise arise, the debtor must enter a new loan relationship, both relationships must involve connected companies, the new debt must not exceed the old, fair value accounting must be used, and the new loan must not exceed its fair value at inception.

How does section 361B affect the taxable credit arising on a debt release between connected companies?

Where all conditions are met, the taxable credit on the old debt release is reduced by the amount of the new loan. For example, if a £10 million loan is released and replaced by a £7 million loan, the sheltered credit is limited to £7 million. The remaining £3 million may still be taxable under other provisions.

Can you give an example of how the debt-for-debt exception works in practice?

If Company A owes £10 million to connected Company B and the debt is replaced with a new £6 million loan at fair value, section 361B reduces the taxable credit by £6 million. Only the remaining £4 million release potentially falls to be taxed under the connected companies rules, rather than the full £10 million.

Corporation Tax Act 2009 section 361B

The debt-for-debt exception

Section 361B provides an exception from the connected companies debt release rules where an old loan relationship is replaced by a new one, so that the debtor company is not taxed on the amount of debt effectively written off through the refinancing.

When a debtor company replaces an existing loan with a new loan from a connected company, and the new loan is for a lower amount, the release of the difference is not treated as a taxable credit under the connected companies rules.
The exception applies where the old loan relationship is replaced by a new one, the parties to both relationships are connected, and the new debt is less than the amount released from the old debt.
The new loan must be accounted for at fair value by the debtor company, and the amount of the new loan must not exceed its fair value at the time it is created.
Where the exception applies, any credit that would otherwise arise on the release of the old debt — to the extent it does not exceed the amount of the new loan — is excluded from being brought into account.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member