Two companies owned by my client have an intercompany loan which has become partially unrecoverable due to a fall in value of the underlying investment property.  Both the loan and the investment property use fair value accounting under FRS102.

For tax purposes, can I net off the gain from the impairment of the loan in the creditor company against the fair value reduction in the property as both are currently going through the P&L?

Special rules apply to connected party loan relationships.

Connected for these purposes means:

  • A controls B,
  • B controls A, or
  • A and B are both controlled by the same person.

CTA 2009, s.466

Control is not simply ownership and can be created in various ways.

  • By means of holding shares,
  • By possession of voting power, or
  • As a result of powers conferred by the articles of association.

CTA 2009, s.472

HMRC’s guidance is at CFM35010.

Where connected companies impair or realise a loan, no expense is allowable in the creditor company for either an impairment or the release of a debt (CTA 2009, s.354) and no income is taxable in the debtor company for the impairment or the released debt. (CTA 2009, s.358)

There are some exceptions for which see CFM35300 but it appears none of these apply here.

Therefore, if the companies are connected companies as defined by s466 CTA 2009, the loan relationship debit and credit are disregarded for tax purposes.

FRS102 – Section 16 requires Investment property to be recognised initially at cost and subsequently to be measured at fair value at each reporting date with fair value changes going through profit or loss.

The tax treatment in UK tax law departs from the accounting standards by disallowing depreciation and revaluations in respect of capital assets but not where those assets fall within the Loan Relationship or Intangible Assets regimes.

In association with Croner Taxwise

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