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Acquiring a loan relationship at less than market value: examples

Example 1

Millet Ltd buys a security on the open market for £5m redeemable in 5 years. In Year 3, when the market value of the security is £5.5m, it sells it to Hildon Ltd for £4.5m. Millet Ltd and Hildon Ltd are companies owned by Mr and Mrs Brown, and so are associated but not grouped.

»Ê¹ÚÌåÓýapp transaction is not at arm’s length so CTA09/S444 applies.

Millet Ltd

Millet Ltd’s records will show a credit of £4.5m, giving rise to a loss on sale of £0.5m. Under S444(1), this credit is disregarded, and instead the arm’s length value is substituted and the ongoing debits and credits calculated accordingly. As a result there is a profit of £0.5m.

Hildon Ltd

Hildon Ltd, in its records, will recognise a debit of £4.5m and accrue the ‘market� discount of £0.5m (the difference between the purchase price £4.5m and the redemption value of £5m) as credits. If S444(1) made Hildon Ltd substitute true market value, £5.5m, these credits would be ignored, and instead it would debit the ‘market� premium of £0.5m over the remaining term, being the difference between market value £5.5m and the redemption amount £5m. However, S444(1) does not apply to debits where the security was acquired for less than market value. So the debit of £4.5m stands and the whole ‘market� discount of £0.5m, following the accounts, is brought in.

Example 2

Millet Ltd buys a security on the open market for £5m, redeemable in 5 years. In Year 3, when the market value of the security is £4.5m, it sells it to Hildon Ltd for £4m. Millet Ltd and Hildon Ltd are companies owned by Mr and Mrs Brown, and so are associated but not grouped. »Ê¹ÚÌåÓýapp transaction is not at arm’s length so S444 applies.

Millet Ltd

Millet Ltd’s records will show a credit of £4m, giving rise to a loss on sale of £1m. Under S444, this credit is disregarded, and instead the arm’s length value is substituted and the ongoing debits and credits calculated accordingly. As a result there is a loss of £0.5m.

Hildon Ltd

Hildon Ltd, in its records, will show a debit of £4m and will accrue the ‘market� discount of £1m (the difference between the purchase price £4m and the redemption value of £5m) as credits. S444 does not apply to debits arising from the acquisition of rights under a loan relationship where those rights are acquired for less than market value. As a consequence the acquisition price is not adjusted to the higher market value and the acquiring company continues to accrue the ‘market� discount of £1m.