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Connected party debt

CTA09/PT5/CH4 applies only where the transferor and transferee are members of the same group: any ‘connection� between the parties to the loan relationship within the connected company rules (CFM35000) is irrelevant. However, it is common for group members to transfer intra-group loans.

»Ê¹ÚÌåÓýapp connected company rules normally restrict a profit or loss on a related transaction, such as a disposal, of a connected person’s loan (CTA09/S350 - CFM35000). But where

• a loan relationship is held between two companies in the same group, and
• the loan relationship is transferred to another group company,

»Ê¹ÚÌåÓýapp group continuity rules apply to ignore the transfer. So there is no profit or loss to restrict under S350.

In order to arrive at the ‘notional carrying value� of a loan relationship that is transferred, the carrying value for accounting purposes is adjusted for the effect of tax provisions, including the connected party rules. Thus an intra-group transfer will not crystallise an impairment loss in the form of a realised loss. See the example at CFM34100.

Where a transferor company uses fair value accounting for the loan relationship being transferred, S340 does not apply, and S341 applies instead (CFM34070). But if the loan relationship is with a connected party, CTA09/S349(2) requires the use of an amortised cost basis of accounting for tax purposes, over-riding the actual accounting treatment. It is therefore S340 which applies in these circumstances, rather than S341.