Corporation Tax Act 2009 section 454

Application of fair value accounting: reset bonds etc

Section 454 requires that debits and credits on loan relationships represented by bonds whose terms change after issue must be calculated using fair value accounting, primarily to counter avoidance arrangements involving reset bonds transferred within corporate groups.

• Where a bond's terms change after issue (a "reset bond"), any debits and credits arising from that loan relationship must be determined on a fair value accounting basis.
• This rule targets avoidance schemes where a company subscribes for a reset bond that increases in value after its terms are changed.
• In typical avoidance arrangements, the bond is transferred to another group company at cost using intra-group transfer rules, and that company is then sold outside the group at market value.
• Without this provision, the profit on the bond would be reflected as a capital gain on the sale of the subsidiary rather than being brought into account as a taxable credit under the loan relationships rules.