Corporation Tax Act 2009 section 666

Allowable loss treated as accruing

Section 666 provides for an allowable capital loss to arise when a company pays an amount to settle obligations under a debtor loan relationship that contains an embedded derivative, and the net cost of that settlement exceeds the original carrying value of the equity element of the instrument.

• Where a company discharges a debtor relationship containing an embedded derivative, a capital loss may arise for corporation tax on chargeable gains purposes
• The loss equals the excess of the amount paid (reduced by the fair value of the host loan contract at that time) over the tax-adjusted carrying value of the relevant derivative contract when the company first became a party to the debtor relationship
• The host contract is the loan relationship element that results from splitting the instrument into its loan and derivative components under the embedded derivative rules
• Transitional provisions may disapply this section where the debtor relationship liability existed immediately before the company's first accounting period beginning on or after 1 January 2005